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The Eclectica Fund

28 February 2011

PERFORMANCE ATTRIBUTION REPORT

Fund Performance Since Inception

Monthly and Yearly Performance % ( A Shares net of fees) AUM: $234, 600, 000

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

2002 +0.0 -4.8 -0.1 +0.8 -4.2

2003 +5.2 -8.1 -4.6 +8.8 +16.2 +1.9 +1.8 +4.2 +7.8 +1.9 -3.7 +12.4 +49.9

2004 +4.0 -1.0 +4.6 -4.9 -0.9 -1.7 -0.2 +0.5 +3.4 +5.7 +1.7 -3.0 +8.0

2005 +2.4 +9.7 -2.5 -0.1 -4.8 +3.5 +0.0 +4.2 +8.5 -7.0 -4.8 +5.9 +14.2

2006 +12.7 -8.2 -0.8 +3.6 -5.4 +3.6 -5.9 -2.1 +2.2 -2.1 +0.9 -0.6 -3.7

2007 +0.7 +1.7 -2.9 +0.7 +1.8 +3.7 -1.0 -6.4 +1.8 -1.8 -3.4 +7.5 +1.6

2008 +5.5 +18.0 -15.6 -2.7 -3.9 +2.4 -9.1 -1.7 -5.7 +49.8 +2.9 +0.4 +31.2

2009 +1.9 +3.7 -2.1 -5.4 -0.9 -1.4 -1.7 +0.9 -0.1 -1.9 +3.0 -4.0 -8.0

2010 +3.7 +5.2 -0.2 -0.5 +1.7 +2.5 +0.6 +1.6 -3.1 -1.9 -4.3 -2.1 +2.7

2011 -1.1 -1.0 -2.1

Discretionary Global Macro

The investment objective of the Fund is to achieve capital appreciation, whilst limiting risk of loss, by investing globally long and short mainly in quoted securities, government

bonds and currencies, but also in commodities and other derivative instruments.

Source: Daiwa. Calculation on NAV basis.

*HFR Macro Index in USD Assumes constituent funds performance is fully hedged.

Bloomberg Ticker: HFRXM Index. Past performance is not a guide to future returns.

Monthly Performance Attribution

As I am sure you all know, we have been patiently waiting (and waiting, and waiting) for someone to ring a bell indicating that the global

inventory cycle has peaked. At this point, it is our intention to put rate risk back on our book. However, as we have diligently awaited a more

prosperous underwriting background the Fund lost 1% in February.

Rates cost a further 48bps, as the option premiums have contracted. The Japanese CDS portfolio gave back 72bp and elsewhere in the book

ong equities made 31bps, tobacco bonds made 23bps, shorts cost 15bps, and FX cost 13bps.

News that Nippon Steel has agreed to merge with Sumitomo Metal saw credit spreads tighten in the steel sector where we maintain a large

exposure. With little business overlap and with both groups already making full use of their blast furnace capacity we do not share the

market's enthusiasm for this deal. Rather, we see it as a shotgun wedding that seeks to bolster Sumitomo's perilous financial condition. The

proposed deal will raise the combined entity's net debt to $29bn. We would remind you that steel is a volatile and cyclical business and that

both companies export nearly half of their output. Are the odds of a debt restructuring event really a 200:1 long shot? And yet Japan's

financial community shows no let up in their enthusiasm to risk $10m (less recovery) to receive annual premiums of just $60k per annum.

We will comment on the consequences of the Japanese earthquake in next month's report and will be shortly sending the mid-month

estimated NAV. I am available should anyone desire more information.

Before this dreadful event we commenced rebuilding some modest rate exposure. We were motivated by the prospect that member

countries of the world's two fixed exchange rate regimes (i.e. the Euro countries and the Asian dollar peggers) would tighten or continue

tightening monetary policy this year.

In fact, Mr. Trichet so much as confirmed a European hike in his hawkish address at the March ECB meeting. Effectively, he raised rates. In

doing so he risks drawing an undesirable comparison with the policy failures of the 1920s that came to a head in 1931 when the UK was forced

to increase rates despite having already endured six years of peripheral European-like fixed exchange rate austerity.

75

100

125

150

175

200

225

250 Fund HFR Macro Index0.18%

-0.14%

-0.15%

-0.72%

-0.09%

-0.08%

-0.8% -0.4% 0.0% 0.4%

Equity (Net)

Carry

Bonds

CDS

Currency

Commodity


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The Eclectica Fund

28 February 2011


Fed QE

RejectsGlobalisation

Rejects ChinaGaming FX

Fed Seeks toCreate Domestic

Price InflationOverseas

Fed Seeks toRevalue China et al

FX Real v NominalPrices

But China ImposesTighter Credit

Controls to OffsetFed Stimulus

And Euro DebtorCountries Raise

Rates Despite HighUnemployment a

la 1931

And so EM Growth

Slows

And with a sixmonth lag US /Germany Slows

But Zero LowerBound RestrictsMonetary Policy

And HighSovereign Debt

RestrictsAdditional Fiscal

Stimulus

Asia's creditor nations have of course been tightening their monetary policy since January 2010 and with the usual leads and lags one should

soon be able to calibrate its effect on the real economy. Regardless, this restrictive policy is set to continue and in our opinion represents a

significant and potentially calamitous development for the global economy.

In a sense, the macro outcome hangs on ones interpretation of quantitative easing. It is my assertion that monetary easing represents an

enormous change to the benign policy which has driven global growth for the past 15 years. I equate the easing program with Roosevelt's

devaluation of the dollar in 1931 (that year keeps reappearing). By this I mean it could mark the moment when modern American policy

makers rejected globalisation. It is a direct attempt to address and remove the free rider (or mercantilist) problem associated with managing

the dollar as a public international good.

For the dollar's role as the world's sole reserve currency to continue I would contend that it is necessary that any one country's adoption ofthe exchange rate should not subtract from anothers economic participation. In other words, China's gaming of the system via its cheap

currency peg should not subtract from the benefit to the US from having richer nations with which to trade.

However, the elevated state of private sector indebtedness in the US has thrown a spanner in the works. China's vendor financing agreement

remains available but the willingness of the US private sector to borrow more has been chastened by the memories of 2008; perhaps there is

a limit after all to the amount of leverage any economy can sustain for any given rate of interest.

As a result of this paradigm shift the dollar's role as the international reserve currency can no longer be viewed so benignly inside America: its

unemployment remains stubbornly high whereas China's total exports have recovered and are now well above their pre-2008 level.

Furthermore, with the US economy nearly slipping back into recession last summer the free rider nature of an international competitor's

under-valued exchange rate could no longer be assuaged by the prospect of a better tomorrow, i.e. the much promised realignment of the

Chinese economy from exports to consumption. With China unlikely to voluntarily cede the competitive advantage of a cheap nominal

currency, QE2 was chosen to do the job for them (by seeking a real appreciation in the renminbi via higher domestic Chinese prices).

I get this. I even sympathise with some of it, but it potentially opens up a can of worms. Please allow me to explain.

Liaquat Ahamed, in his essay in the March/April edition of Foreign Affairs magazine, raises the crucial concept of policy asymmetry as a

potential Achilles heel in the orderly management of pegged exchange rates. Europe's deficit countries have no policy choice; without a

currency of their own they must contract credit in order to control prices and regain international competitiveness. Of course there is no

similar compulsion for China and other creditors to loosen their monetary policy and allow domestic prices to rise. Such action would eat

away at their cherished export competitiveness.


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The Eclectica Fund

28 February 2011


Asset Allocation Summary (% NAV) CDS Position Breakdown Summary (% NAV)

* CV01 figure represents basis point contribution for a 1bp rise in the weighted average credit spread

of the portfolio.

** Based on Corporate CDS Recovery Rate of 25%.

Commodity & FX include listed & OTC derivatives, cash or futures on a net delta basis.

Equity include listed & OTC derivatives, cash or futures on a net delta basis.

CDS figure represents max loss.

Interest rate figure represents net option premium.

DV01 figure represents basis point contribution for a 1bp rise/steepening/widening of the

underlying rate/curve/spread.

Notional

Exposure

Annual

Carry

CV01

(bps)*

Profit at Previous

2yr High

Best

Case**

Total

CDS264 -1.6 9.5 26.0 199.7

Fund Information

Fund Details Fees, Costs & Redemption Structure

Investment Manager Eclectica Asset Management LLP Dealing A Shares 1st & 15th of each month

Administrator Daiwa Europe Fund Managers Ireland Ltd Dealing B & C Shares 1st of each month

Fund Managers Hugh Hendry & Espen Baardsen Dealing Notice 7 days before dealing day

Structure Cayman Islands OEIC within a Master Feeder structure Dealing Line (+353) 1 603 9921

Inception Date 30 September 2002 Dealing Fax (+353) 1 647 5830

Share Classes //$ Dealing Email [email protected]

Minimum Investment 100,000 or equivalent in /$100,000 AMC A Shares 1%

Dividends Accumulated AMC B & C Shares 2%

Stock Exchange Listing Irish Performance Fee 20%

Exit Fee 1% exit fee on reds within 12 months

Service Providers Eclectica Asset Management: Investor Relations

Custodian/Prime Broker 1) Morgan Stanley and Co Int Plc Telephone +44 (0)20 7792 6400

2) Credit Suisse Securities (Europe) Ltd Email [email protected]

Custodian Daiwa Securities Trust & Banking (Europe Plc)

Auditors Deloitte & Touche

This document is being issued by Eclectica Asset Management LLP ("EAM"), which is authorised and regulated by the Financial Services Authority. The information contained in this document relates to the promotion of shares in one or more unrecognised

collective investment schemes managed by EAM (the "Funds"). The promotion of the Funds and the distribution of this document in the United Kingdom is restricted by law. This document is being issued by EAM to and/or is directed at persons who are

both (a) professional clients or eligible counterparties for the purposes of the Financial Services Authority's Conduct of Business Sourcebook ("COBS") and (b) of a kind to whom the Funds may lawfully be promoted by a person authorised under the Act (an

"authorised person") by virtue of Section 238(5) of the Financial Services and Markets Act 2000 (the "Act") Chapter 4.12 of COBS. No recipient of this document may distribute it to any other person. No representation, warranty or u ndertaking, express or

mplied, is given as to the accuracy or completeness of, and no liability is accepted for, the information or opinions contained in this document by any of EAM, any of the funds managed by EAM or their respective directors. This does not exclude or restrict

any duty or liability that EAM has to its customers under the UK regulatory system. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any securities mentioned herein nor

shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. Recipients of this document who intend to apply for securities are reminded that any such application may be made solely on the basis of the

nformation and opinions contained in the relevant prospectus which may be different from the information and opinions contained in this document. The value of all investments and the income derived therefrom can decrease as well as increase. This may

be partly due to exchange rate fluctuations in investments that have an exposure to currencies other than the base currency of the relevant fund. Historic performance is not a guide to future performance. All charts are sourced from Eclectica Asset

Management LLP. Side letters: Some hedge fund investors with significant interests in the fund receive periodic updates on the portfolio holdings. 2005-11 Eclectica Asset Management LLP; Registration No. OC312442; registered office at 6 Salem Road,

London, W2 4BU.6

Do not be mistaken; it was pursuit of their own self-interest that encouraged China to take one for the team back in 2008 when it

unilaterally boosted public spending and sanctioned a massive surge in bank lending. If we measure success on the basis of GDP growth, then

this decision has been vindicated. Chinese government data reveals a major turnaround in the contribution of net exports to growth, from

-3.7pct in 2009 to +0.8pct in 2010. Yet it is important to recognise that there was no exigent need to act in the way they did; they could just as

easily have chosen to reduce leverage and withdraw from risky overseas lending.

Nonetheless, the ramifications of Chinas actions during the crisis ensured the development of a nascent but very real

over-investment/property bubble. The Chinese are at the same time nursing an unprecedented income gap between the haves and the

have-nots. QE2 undoubtedly exacerbates these social disparities even further.

The eerie similarities between the Great Recession and the depression of the 1920s have to some extent dissipated, due in large part to thewillingness of Asian creditors to stimulate their domestic economies and bridge the gap left in the wake of severe economic contraction in the

West. Recently, however, the spectre of domestic inflation has prompted the East to remove the punch bowl.

Now the question to ask has to be whether or not China would be prepared to assume the role of hero all over again if global GDP runs out of

steam. The Fed's antagonistic quantitative easing program may have sapped its willingness to help out team world, in which case the only

remedy for a prospective slow down will be further QE and a Western commitment for rates to remain lower for longer.

IRS DV01 (bps) EUR GBP USD JPY AUD HUF

Outright Swaps - - - - - 0.3

Swap Curve - - 1.3 - - -

FRA/OIS Spreads 4.5 2.2 - 9.6 - -

Sovereign (4)

Jap Steel (122)

Jap Shipping (36)

Jap Chemical (42)

Capex (47)

Corp Other (13)

Currency (7.9)

Long Equity (15.5)

Short Equity (-2.9)

Commodity (4.2)

Corp Bonds (3.6)

Gov Bonds (-0.2)

Interest Rates (2.7)

CDS (5.5)
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