introduction to alternative investments - ksu foundation

Entrepreneurial Qualities, Citi Benefits

Introduction to Alternative Investments

February 2008

22

This document does not constitute an offering and is meant only to provide a broad overview for discussion purposes. All information provided herein is subject to change. If and when an investment opportunity is structured, you must obtain and carefully read the related Offering Memorandum, which will contain the information needed to evaluate the potential investment and provide important disclosures regarding risks, fees and expenses. All information provided herein is qualified in its entirety by the Offering Memorandum and the related subscription agreement.

An investment in alternative investments can be speculative and not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing to bear the high economic risks associated with such an investment. Investors should carefully review and consider potential risks before investing. Certain of these risks may include:

-loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices;-lack of liquidity in that there may be no secondary market for the fund and none is expected to develop;-volatility of returns;-restrictions on transferring interests in the Fund;-potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized;-absence of information regarding valuations and pricing;-complex tax structures and delays in tax reporting;-less regulation and higher fees than mutual funds; and-advisor risk. Individual funds will have specific risks related to their investment programs that will vary from fund to fund.Past performance does not guarantee future results.While some information used in this document has been obtained from various published and unpublished sources considered to be reliable, neither CAI nor any of its affiliates guarantee its accuracy or completeness and accepts no liability for any direct or consequential losses arising from its use. This information is confidential and may not be duplicated without the consent of CAI.

All expressions of opinion are as of the date hereof, subject to change without notice, not intended to be a forecast of future events or a guarantee of future results, and may differ from the views of other businesses of Citigroup.

Investment Products: - Not FDIC Insured - No Bank Guarantee - May Lose Value

Significant Investment ConsiderationsImportantInformation

33

This presentation describes a financial model that attempts to derive return and volatility characteristics for, and correlations among, a wide variety of investment asset classes. The model relies on index data for many of these asset classes and, in certain cases, the data has been statistically adjusted to correct for certain structural biases in the indices. Certain alternative asset classes, such as private equity and real estate, are illiquid and thus not subject to regular pricing by the financial markets. We have attempted to derive returns, volatilities and correlations for these asset classes by using certain market observations and a variety of statistical techniques. The analysis also involves making a number of assumptions, which may not prove to be valid and may materially alter the results. In certain respects, such as the time periods selected, judgments, which could be viewed as arbitrary, have been made in assessing data that formed the basis for the model and in designing the model. While we believe our observations to be theoretically sound, you should be aware that this analysis involves a high number of estimates and is subject to an unusual degree of uncertainty. Any conclusions reached by you or your professional advisor based on this model should be evaluated in this light

For all asset classes, our allocation method is heavily dependent on our analysis of historical data. No assurance can be given that historical parameters will accurately predict future characteristics or that our analysis is accurate. To the extent that future events vary from these historical parameters, the performance of a portfolio may differ significantly from that estimated by the model, and losses may be incurred. The model output is also dependent on the assumptions made

The “Citi Private Bank” is a business of Citi, which provides private banking clients access to a broad array of products and services available through bank and non-bank affiliates. Not all products and services are provided by all affiliates or are available in all locations, and not all investments are suitable for all investors. Citi Private Bank Private Bankers and Relationship Managers in the U.S. region are registered representatives of Citigroup Global Markets Inc. (“CGMI”), member SIPC. In the U.S., brokerage services are offered through CGMI an affiliate of Citigroup Inc. Securities are not insured by the FDIC, are not deposits or obligations of, or guaranteed by, Citigroup/Citibank or any of their respective affiliates, and are subject to investment risks, including possible loss of the principal amount invested. Citi Smith Barney is a division and service mark of Citigroup Global Markets Inc., member NASD/SIPC.

ImportantInformation Significant Investment Considerations

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Table of Contents

I. Introduction to Alternative Investments

II. Why Alternative Investments Matter

III. Participation in Alternatives in College and University Portfolios

IV. Allocating to Alternative Investments

V. Private Equity

VI. Hedge Funds

VII. Real Estate

VIII. Structured Products

IX. Managed Futures

CitigroupAlternativeInvestments

55

Alternative Investments Defined

The name "alternative investments" suggests new and obscure investments, however alternative investments have existed and been established for decades− Hedge Funds (1949)*, Modern Venture Capital (1946)**, Real Estate (centuries old)

Alternative investments often share a few principal characteristics that help identify them as such:− Historically low to moderate correlation with traditional asset classes (stocks and bonds).***

− Not listed on an exchange

− Private investment funds available only to high net worth and institutional investors

− Reduced liquidity


*Source: Mark Anson, Handbook of Alternative Assets, (New York: John Wiley & Sons, Inc., 2002), p. 12. **Source: Mark Anson, Handbook of Alternative Assets, (New York: John Wiley & Sons, Inc., 2002), p. 262. ***Past correlations do not guarantee future correlations. Real results may vary.

66

Major Alternative Asset Classes*

Basic Descriptions


Private Equity Negotiated private investments in (most often) non-public companies at different stages of maturity with the objective of reselling at a higher price in the future

Hedge Funds Private investment funds investing primarily in the global equityand fixed income markets and typically employing sophisticated trading strategies, using leverage and derivative instruments

Real Estate Negotiated private investments in real estate assets with the objective of generating current income and/or reselling at a higher value in the future

Structured Products Pools of fixed income securities purchased with equity from investors and leveraged with the objective to generate spread income for investors

Managed Futures Investments in global markets including futures, options and forwards on traditional commodities, financial instruments and currencies

*Please review the important risk considerations discussed in slides 9, 17, 18, 28, 36, 37, 46, 51, and 58.

77

Alternative Investments Differ From Traditional Investments

Traditional Investments Alternative Investments

Relative performance objective*

Generally no leverage

Performance dependent primarily on market returns

Historically high correlation with market indices

Typically offers daily liquidity

Fixed management fee on assets under management

Absolute performance objective*

May use leverage

Performance dependent primarily on advisor skill

Historically low to moderate correlation with market indices

Typically have reduced liquidity ranging from monthly to 12+ year lock-ups

Generally higher fees which may include performance fees


*There is no guarantee that these objectives will be met.

88

Alternative Investment Managers Generally Have Increased Investment Flexibility

However, the added flexibility also increases risks

Hedge Fund managers have the flexibility to invest opportunistically in strategies where they see value…

Hedge Fund managers can short-sell securities they believe will fall in value and thereby may profit from declining markets if they are correct in their judgment…

Hedge Fund managers can use derivatives and leverage to hedge or magnify returns (however this also increases risk)…

Private Equity fund managers may have increased access to information regarding private investments…

Private Equity fund managers often invest based on a negotiated price…

…while traditional money managers may be constrained to invest in certain pre-defined markets

…while traditional money managers face limits on short-selling and may be required to be invested even if they believe markets are in a declining trend

…while traditional money managers are limited in their use of derivatives and leverage

…while traditional money managers must rely on publicly-available information, because they only invest in the public markets

…while traditional money managers typically pay market prices

Selected Examples: Hedge Funds and Private Equity


99

Alternative Investments Can Pose Risks Beyond Those That Exist In Traditional Investments

The use of leverage can result in substantial losses if an investment does not behave the way the investment manager predicted

Alternative investment managers are often compensated in part through incentive fees(carry) which may create the incentive for the investment manager to take on more risk, particularly if the fund NAV is below par

Reduced liquidity in certain alternative investment markets may make it difficult to exit an investment during times of stress

Most private investment funds are subject to less regulation than their public counterparts, thereby reducing the level of supervision over an investment manager's activities


1010

Historically, Adding Alternative Investments To Traditional Portfolios May Have Resulted In Enhanced Risk Adjusted Returns (October 1990 – June 2007)

Source: Equity: S&P 500 Index. Bonds: Lehman Aggregate Bond Index. Private Equity: Venture Economics Private Equity Universe. Hedge Funds: HFRI Fund of Funds Index. Real Estate: NCREIF National Property Index. Managed Futures: CISDM IndexNote: All performance data based on historical returns from October 1990 through June 2007. This is the most recent data available for all asset classes collectively.Past performance does not guarantee future results. Real results may vary. Investors cannot invest in an index. See Appendix for a definition of indices used.


Comparative Return ProfileFor Illustrative Purposes Only

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0% 2% 4% 6% 8% 10% 12% 14% 16%

Standard Deviation

Ann

ualiz

ed R

etur

n

Stock & Bonds

Stock & Bonds withAlternatives

1111

Historically, Low to Moderate Correlation With Traditional Assets Has Provided Diversification Benefits

Source: Citigroup Alternative Investments analysis based on index data. U.S. Large Cap Equity: S&P 500, U.S. Bonds: Lehman Aggregate Bond Index. Leveraged Buyouts: Venture Economics (pooled, time weighted returns). Hedge Funds: HFRI Fund of Funds Index. Real Estate: NCREIF National Property Index. Managed Futures: CISDM IndexNote: All performance data based on historical returns from January 1990 through June 2007.

Past correlations do not guarantee future correlations. Real results may vary. Investors cannot invest in an index.

1.000.20-0.16-0.180.01-0.23-0.06Real Estate

1.000.56-0.030.63-0.21-0.03Leveraged Buyouts

1.000.120.46-0.120.11Hedge Funds

1.00-0.160.370.11Managed Futures

1.00-0.040.06U.S. Large Cap Equities

1.000.21U.S. Bonds

1.00Cash

Real EstateLeveraged Buyouts

Hedge Funds

Managed Futures

U.S. Large Cap

EquitiesU.S.

BondsCashAsset Correlations


1212

Alternative Investments May Differ Substantially In Risk/Return Characteristics…

Source: CISDM (MAR), HFR, Venture Economics, NCREIF and PerTrac. Please refer to Appendix for descriptions of indices used throughout this document. Annualized performance statistics based on compounded monthly returns except for Venture Capital, LBO and Private Real Estate data which is based on quarterly returns. Sharpe Ratio is calculated using 3-month T-bill as the risk free ratePast performance does not guarantee future results. Real results may vary. Investors cannot invest in an index


Investment Style Risk/ReturnJanuary 1990 – June 2007

0.00

4.00

8.00

12.00

16.00

20.00

24.00

28.00

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 22.00 24.00

% Annualized Risk

% A

nnua

lized

Ret

urn

Global Equity[excl. U.S.]

(0.2)

Global Equity[excl. U.S.]

(0.2)

U.S. Equity(0.5)

U.S. Equity(0.5) Emerging

Market Equity(0.3)

Global Macro (1.4)

Long/Short Equity(1.5)

Merger Arbitrage

(1.5)

Distressed Securities

(1.9)

Global Bonds(1.0)

Global Bonds(1.0)

Fixed Income Arbitrage

(0.9)U.S. Bonds

(0.7)U.S. Bonds

(0.7)

Equity Market Neutral

(1.6)

StatisticalArbitrage

(1.2)

Convertible Arbitrage

(1.7) Managed Futures

(0.6)

Managed Futures

(0.6)

Venture Capital(0.6)LBO

(1.1)

Private Real Estate

(1.2)

Private Real Estate

(1.2)

REITs(0.7)

REITs(0.7)

(Sharpe Ratio)

1313

…And Vary Greatly In Their Liquidity Characteristics

Liquid

Private Equity

Real Estate

Hedge FundsConvertible Arbitrage

Fixed Income Arbitrage

Statistical Arbitrage


Long/Short Equity

Global Macro

Merger Arbitrage

Distressed Securities

Illiquid


Bonds

Equities

Managed Futures

1414

Large College Endowments Are Heavily Invested In Alternatives…

Portfolio Allocation and Corresponding Portfolio Performance

III. Participation by College Endowments

Portfolio ReturnsPortfolio Allocations (a)

7%9%7%93%< $25m

7%10%12%88%$26 - $50m

8%11%17%83%$51 - $100m

9%12%25%75%$101m - $500m

10%12%34%66%$501m - $1.0b

11%14%40%60%>$1.0 b

10 Year5 YearAlternativesTraditionalEndowment Size

Source: National Association of College and University Business Officers (NACUBO) 2007 study of 778 institutions published 1/24/2008. Five (5) year returns cover the period from June 2002 to June 2007. Ten (10) year returns cover the period from June 1997 to June 2007. However, this study does not indicate how much of the portfolio returns were attributable to the allocation to alternatives. Note: The larger the endowment, the better the ability to diversify. Past performance does not guarantee future results. Real results may vary.(a) “Traditional” includes Equity, Fixed Income and Cash. “Alternatives” include Real Estate, Hedge Funds, Private Equity, Venture Capital, Natural Resources and Other.

1515

…And Diversified Across a Broad Spectrum of Alternative Asset Classes

Assets Equity

%

Fixed Income

% Cash

%

Real Estate

%

HedgeFunds

%

PrivateEquity

%

VentureCapital

%

Natural Resources

% Other

%

Total Traditionals

%

Total Alternatives

% 1-yr %

3-yr%

5-yr %

10-yr%

> $1.0B 47 11 2 5 21 7 3 4 1 60 40 21.3 16.4 13.9 11.1

$501MM – 1.0B 51 13 2 5 18 6 2 2 1 66 34 19.3 14.2 12.3 9.5

$101 - $500MM 57 15 3 4 14 3 1 2 2 75 25 18.0 13.1 11.5 8.5

$51 - $100MM 60 19 4 4 9 1 0 1 2 83 17 16.7 11.9 10.8 7.9

$26 - $50MM 63 21 4 3 7 1 0 0 1 88 12 15.9 10.7 9.8 7.3

< $25MM 60 27 5 2 3 0 0 0 1 93 7 4.1 9.7 8.8 6.7

Portfolio Allocations Portfolio Returns


Source: National Association of College and University Business Officers (NACUBO) 2007 study of 778 institutions published 1/24/2008. One (1) year returns cover the period from June 2006 to June 2007. Three (3) year returns cover the period from June 2004 to June 2007. Five (5) year returns cover the period from June 2002 to June 2007. Ten (10) year returns cover the period from June 1997 to June 2007. However, this study does not indicate how much of the portfolio returns were attributable to the allocation to alternatives. Note: The larger the endowment, the better the ability to diversify. Past performance does not guarantee future results. Real results may vary.(a) “Traditional” includes Equity, Fixed Income and Cash. “Alternatives” include Real Estate, Hedge Funds, Private Equity, Venture Capital, Natural Resources and Other.

1616

Strategic Asset Allocations

Some Recognized Academic Leaders Have Been Significantly Invested in Alternatives

412 9

26

40

34

23

15

18

10

11

2823

33

19

Yale Stanford Harvard

Real Estate &Commodities

Private Equities

Hedge Funds

Equities

Fixed Income

Source: Yale Endowment 2007 Annual Report, Harvard Management Company 2006-2007 Annual Report, Stanford University 2006 Annual Report. Harvard University’s Policy Portfolio includes a (5)% allocation to cash.


1717

Despite Attractive Characteristics, Alternative Investments HaveSignificant Risks

Risk Risk Definition

Valuation Risk Certain alternative investment funds often trade in esoteric and/or illiquid securities. In normal markets it is sometimes difficult to price these instruments, causing managers to estimate market values. In stressed markets this problem may be magnified, leaving investors with an imprecise understanding of a portfolio's Net Asset Value. Valuations for investments for which market quotations are not available may at times be estimates, which may affect the amount of the management and incentive fees

Specialized Trading Special investment techniques such as leveraging, short-selling and investing in derivatives, including options and futures, may result in significant losses

Manager Risk Investing in a fund exposes investors to risks particular to that fund manager. These risks can include poor decision making, key personnel departures or fraud, among others. In the case of a fund of funds, although the Investment Manager selects managers it believes are prudent and reliable, managers could perform poorly or reach capacity

Liquidity Risk Interests in certain alternative investment funds are generally not readily marketable and not redeemable. Interests in a fund generally are not transferable except in limited circumstances. Accordingly investors have to bear the risks of investing for the full duration of the lock-up period

Investment Process/Model Risk

The Investment Manager's investment process may be heavily dependent on the Investment Manager's analysis of historical data. No assurance can be given that these analyses will accurately predict future results


1818

Despite Attractive Characteristics, Alternative Investments HaveSignificant Risks (Cont.)


Risk Risk Definition

Market Risk The value of securities, commodities, and currencies may fluctuate reflecting a variety of factors, including changes in investor outlook and political and economic environments.

Strategy Risk Investments in diverse and sometimes complex strategies are affected in different ways and at different times by changing market conditions. Strategies may at times be out of market favor for considerable periods, with adverse consequences for the portfolio.

Incentive Compensation

Managers will, in general, receive performance compensation, which may give the managers incentives to make investments that carry greater risk or more speculative than might be the case if no performance compensation were paid.

Default Remedies If an investor fails to fund a capital call from a fund when due, the fund may exercise various remedies with respect to such investor and its interest including, but not limited to, causing the investor to forfeit or sell all or a portion of its interest in the fund or requiring that the investor immediately pay up to the full amount of its remaining capital commitment.

1919

Alternative Asset Classes Challenge Traditional Assumptions That Are Fundamental For Asset Allocation

Alternative investmentsTraditional investments

Accurate measurement of returns

Risk is appropriately measured

Asset returns are comparable• Marked-to-market valuations• All assets are fully liquid

Markets are • Open to common set of investors• Efficient

Data measured over same time periods

Inconsistent measurement of returns

Risk is not captured by data

Asset returns are not comparable• Mixture of stale and current valuations• Variable degrees of liquidity

Markets are • Not open to all investors• Not efficient

Data measured over different time periods

IV. Allocating To Alternative Investments

2020

What Do We Believe is Wrong With Other Asset Allocation Approaches When We Consider Alternatives?

Excluding alternatives from a portfolio• Investors forgo the potential benefits of diversification, risk-reduction and return enhancement that alternative

investments may offer. Of course, those benefits cannot be guaranteed and investing in alternatives always carries a degree of risk

Optimizing the traditional part of the portfolio and separately allocating a pre-determined percentage to alternatives

• The different parts of the portfolio cannot be separately allocated

• Liquid alternatives can in some instances replace traditional asset classes and diversify the portfolio

• The illiquid part of the portfolio affects the liquid part of the portfolio

Including alternatives in the optimization using the existing data• Inappropriately measuring risk and correlation can lead to unreasonable and inappropriate allocations

• Return forecasts must be integrated across all asset classes

We believe that the most appropriate approach is to have a unified asset allocation model that integrates forecasts and appropriately measures risk


2121

Our Approach To Asset Allocation Attempts To Identify and Address Portfolio Management Issues Specific To Hedge Funds

Issue Implication Approach

Survivorship bias

Serial correlation

Strategy "drift"

Return forecasting

Skew and tail risk

Overestimation of returns

Underestimation of risk

Incorrect classification of strategies and funds, leading to bias & misestimate of risk

Forecasts must be fully integrated across asset classes

Underestimation of risk & misallocation

Choose indices that attempt to filter out bias

Unsmooth data to try to correct for serial correlation

Aggregate strategies into more stable units

Use spreads where more stable over time

Theoretically seeks to optimize hedge portfolios against skew and map back to mean –variance frontier

There are 5 major issues related to the inclusion of hedge funds in a traditional portfolio, each of which requires a specific treatment


2222

…We Follow A Similar Approach For Private Equity and Real Estate


Issue Implication Approach

Reported returns are inaccurate and incomplete

• Not comparable to marked-to-market returns

• Do not account for asset liquidity risk

• Do not account for tail risk

Rebalancing costs

Option value/liquidity preference

Misstatement of returns, risks and correlations

Not comparable to marked-to-market returns

Do not account for asset liquidity risk

Do not account for tail risk

Limited ability to dynamically rebalance induces "portfolio cost“

Unforeseen liquidity need implies added risk

Create "marked-to-market model“Add effect for private, illiquid markets to attempt to account for unique forms of riskExplicitly model tails

Apply haircut based on estimated cost

Include as constraint in optimization

2323

Our Approach and Model Yield Several Insights

The addition of alternatives to a portfolio can potentially reduce levels of risk for a given return

Investors without significant liquidity requirements may benefit from taking advantage of above-average returns in illiquid asset classes

The liquid and illiquid parts of the portfolio cannot be separated• One needs to use liquid asset classes to effectively diversify risk in illiquid assets

The recommended ratio of fixed income to public equities increases as one adds illiquid alternatives

• Since LBO and VC are more highly correlated with public equities than other type of alternative investments, they substitute for public equities in a portfolio, thus increasing the fixed income to public equity ratio

• Furthermore, since the illiquids may provide above-average returns with higher risks, they can to some extent by offset by lower-risk, lower-return fixed income assets.

Based on our work in this area, we believe that:


2424

What Is Private Equity?

Private equity can be broadly defined as privately negotiated investments in (most often) non-public companies

Private equity managers are stand-alone, fully integrated organizations that may take an active role in a company's management seeking to create value and exit profitably

Private equity includes the following categories/strategies:

LEVERAGED BUYOUTS ("LBO")

MEZZANINE

DISTRESSED DEBT

VENTURE CAPITAL ("VC")

Seed/Startup Development Expansion Buyout Restructuring

V. Private Equity

2525

Private Equity: Typical Roles and Responsibilities

Limited Partners GeneralPartner/Sponsor

EntrepreneursOperators

Companies

Contribute 95-99% of the fund's capital

Receive a preferred return (8% - 10%) and 80% of the profits

Co-invest with GPs in specific deals (optional)

Identify and screen opportunities

Structure deals

Active board membership & participation

Manage the investment

Earn management fees (1% - 2%) and a "carried interest", typically 20% of the profits

Generally contribute 1% to 5% of the capital

Venture idea

Attempt to build the business

Manage operations

Own stake in the business

V. Private Equity

2626

What Private Equity Firms Do

Issue private placement memorandumMeet with investors

Identify prospectsPerform due diligenceNegotiate terms

Board involvementDevelop strategySelect and recruit managersSupport business activities

Raise Capital Invest Attempt To Build Value

Attempt To Exit

Identify buyersSupport transactionCollect and distribute capital

V. Private Equity

2727

Potential Advantages Of Private Equity Investing

Historically, enhanced return versus the public marketHistorically, lower correlation with major market indices

Long-term Return and Diversification Potential

Private equity firms' financial interest tied to successful investingValue-added operating expertise

Ongoing Involvement

Active role on boards provides ability to influence strategy/change managementPrivate and public sale options controlled by investorsStructured to attempt to mitigate risk (e.g., liquidation preferences, ratchets)

Potential For Control

Detailed due diligence and analysisDirect contact/interactions with management and customers

Access To Information

Access to companies not typically accessible via traditional public markets, however these companies are typically less tested than their publicly-traded counterpartsPotentially lower valuations due, in part, to reduced liquidity, however reduced liquidity limits the opportunity to exit a troubled investment

Opportunity

Past performance does not guarantee future results.

V. Private Equity

2828

Risk Considerations

An investment in a Private Equity Fund can involve a high degree of risk. These risks may include:

V. Private Equity

If an investor fails to Fund a capital call from a fund when due, the Fund may exercise various remedies with respect to such investor and its interest including, but not limited to, causing the investor to forfeit or sell all or a portion of its interest in the Fund or requiring that the investor immediately pay up to the full amount of its remaining capital commitment

Default Remedies:

The investment strategies utilized may include highly speculative investment techniques, highly concentrated portfolios, control and non-control positions and illiquid investments. Because of the specialized nature of the investment, it is not suitable for certain investors and, in any event, an investment in a Private Equity Fund should constitute only a limited part of an investor's total portfolio. There can be no assurance that a Fund will return investors' capital or that cash will be available for distributions

Speculative Investment:

Interests in a Private Equity Fund are generally not readily marketable and not redeemable. Interests in a Fund generally are not transferable except in limited circumstances. Accordingly investors have to bear the risks of investing in the Fund for the full duration of the Fund

Liquidity Risk:

As Private Equity Funds generally will invest in securities that are not readily marketable, the securities generally will be carried at the values provided to the Fund or at cost. These valuation procedures are subjective in nature, do not conform to any particular industry standard and may not reflect actual values at which investments are ultimately realized

Valuation:

2929

Sample Of Recognizable Companies That Have Been Private Equity Portfolio Companies*

Source: Citigroup Private Equity

Venture Capital Buyout Distressed

Apple ComputerFederal ExpressIntel CorporationMicrosoftCisco Systems GenetechCray ResearchDigital EquipmentCompaqEbayAOLAmazonBEA Systems

WorldcomEnronGlobal CrossingTycoRegal CinemaAdelphia

RJR NabiscoSafewayBeatrice FoodsKinko'sLexmarkAllied WasteBurger KingFairchildKnollAMC EntertainmentRemington ArmsJ. CrewUnited Defense

V. Private Equity

For Illustrative Purposes Only

*These companies have been private equity portfolio companies, but Citigroup Private Equity andthe funds that it sponsors have not necessarily directly or indirectly made an investment in them.

3030

Private Equity Has Historically Outperformed Public Equity Markets

Source: Venture Economics and Bloomberg*"All Private Equity," as defined by Venture Economics, is a composite of returns, which includes venture capital, buyouts and mezzanine funds, the latter of which is not a significant component. Please note: All Venture Capital" includes early, seed, and later stages. "All Buyouts" includes small, medium, large, and mega-buyouts**All private equity returns are pooled net IRRs, a method for measuring private equity performance, determined by the amount and timing of cash inflows and outflows as well as the residual value of investments at the end of the period. Net IRR is the rate of return after the exclusion of management fees, expenses and carried interestPast performance does not guarantee future results. Real results may vary. Investors cannot invest in an index.

Over a 20-year period, private equity has outperformed the public equity markets by more than 400 basis points annually, net of fees and profit incentives*

Private vs. Public Market Returns

5.2%

8.3%

17.9%

6.1%

10.5%

0.0 5.0 10.0 15.0 20.0

NASDAQComposite

S&P 500Index

All Buyouts

All PrivateEquity

All VentureCapital

10-Year IRRs**

9/30/97 – 9/30/07

16.4%

9.1%

9.4%

12.8%

13.8%

0.0 5.0 10.0 15.0 20.0 25.0 30.0

NASDAQComposite

S&P 500Index

All Buyouts

All PrivateEquity

All VentureCapital

20-Year IRRs**

9/30/87– 9/30/07

V. Private Equity

3131

Commitments To Global Private Equity Funds By Investor Type (2001 – 9/30/07)

Who Invests In Private Equity?

Source: Venture Economics

14%

23%

13%

11%

10%

8%

9%

12%

14%

Banks 10%Insurance Companies 7%Corporate Non/Pension 6%Pension Fund/Private 10%Pension Fund/Public 12%Family or Individuals 12%Endowment/Foundations 20%Intermediaries 10%Other 14%

V. Private Equity

3232

Private Equity Funds Of Funds

A Private Equity Fund of Funds is a private partnership that aggregates funds from a number of qualified investors for investment into a selected group of private equity partnerships (the Underlying Funds)

2007 global LBO volume exceeded $585 billion making it one of the most active years on record for buyouts. Billion-dollar-plus deals represented 84% of 2007 global LBO volume.

Investments can focus on three areas:• primary or new funds (new partnerships)

• secondary funds (acquisition of stakes in already active partnerships from other investors)

• direct investments (purchasing a direct equity stake in a private firm)

Investment styles vary from fully diversified funds (commingling buyout and venture, international and U.S.) to specialty funds (e.g., early stage venture)

There can be no assurance that these market conditions will remain in the future. Past performance does not guaranteefuture results. Real results may vary.*Source: Citigroup Global Markets and Securities Data Company, December 31, 2007.

V. Private Equity

3333

What Is A Hedge Fund?

No standard definition – term mostly describes the vehicle

Hedge Funds are not new – they have been in existence for over 50 years

Typically, Hedge Funds seek an absolute return*• Unlike traditional vehicles, which manage to a relative benchmark

Primarily invest in publicly-traded securities• Stocks/Bonds/Commodities/Currencies

Employ return enhancement tools such as leverage and derivatives, which typically also involve greater risk

Typically treated as a limited partnership for tax purposes for U.S. taxable investors and as a corporation domiciled in a low-tax/no-tax jurisdiction for U.S. tax-exempt investors and non-U.S. persons

VI. Hedge Funds

*There is no guarantee that this objective will be met.

3434

Hedge Fund Managers Seek Flexibility

A manager's ability to generate alpha is primarily based on its investment strategy

These strategies will often utilize:• Leverage

• Short-selling

• Derivatives

• Illiquid securities

These tools, strategies and securities are used by hedge fund managers with the objective of enhancing returns and reducing risks, however they also increase the risk of losses

Increased flexibility for the manager may increase risks to the investor

VI. Hedge Funds

3535

Hedge Fund Universe: Strategy Descriptions

Directional price movements.Long and short equity investments,generally with long bias.

Long/Short Equity

Directional price movements.Leveraged, directional investing in global currency, equity, bond, and commodity markets.

Global Macro

Value appreciation as companies are restructured.

Investing in securities of companies that have been or are expected to be affected by a situation such as bankruptcy, distressed sale or reorganization.

Distressed

Expected price changes of the securities of companies involved in a merger transaction.

Investments related to event drivensituations such as mergers, takeovers,buyouts, and restructurings.

Merger Arbitrage

Mispricing of related securities.Typically, a two-sided strategy involving the purchase and sale of related securities. Depending on strategy, includes equity, convertible, and bond instruments.

Arbitrage

Relative changes in value of long and short portfolios.

Equal-weighted long and short equityportfolios with similar risk characteristics.


Source of ValueDefinitionStrategy

VI. Hedge Funds

3636

There Are Significant Risks In Hedge Funds That Must Be Considered

Funds of Hedge Funds may have limited redemption dates. Underlying advisors may also have lock-up periods and infrequent redemption dates, thereby limiting the Investment Manager's ability to reallocate assets as market and advisor performance change.

Liquidity Risk

Managers will, in general, receive performance compensation, which may give the managers incentives to make investments that carry more risk or more speculative than might be the case if no performance compensation were paid.

Incentive Compensation

Although Citigroup Alternative Investments selects advisors it believes are prudent and reliable, advisors could perform poorly or reach capacity.

Manager Risk

Hedge Funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may at times be out of market favor for considerable periods, with adverse consequences for the portfolio.

Strategy Risk

The value of securities, commodities, and currencies may fluctuate reflecting a variety of factors, including changes in investor outlook and political and economic environments.

Market Risk

Special investment techniques such as leveraging, short-selling and investing in derivatives, including options and futures, may result in significant losses.

Specialized Trading

Risk DefinitionRisk

VI. Hedge Funds

3737

There Are Significant Risks In Hedge Funds That Must Be Considered (Cont.)

For purposes of its analysis, Citi Alternative Investments utilizes indices compiled by Hedge Fund Research, Inc. ("HFR") based on information from the hedge funds that it tracks. The information underlying the indices and the classification of the underlying funds have not been independently verified by either HFR or Citigroup, neither of which make any representations as to their accuracy.

Reliance on Industry Data

Citi Alternative Investments' strategy allocation methodology is heavily dependent on its analysis of historical data and, in particular, statistical volatility, return, and correlation characteristics. No assurance can be given that the financial parameters will accurately predict future characteristics.

Investment Process Risk

CitiAlternative Investments is an indirect wholly-owned subsidiary of Citigroup, and some or all Placement Agents and the Administrator also are affiliates of Citigroup and Citi Alternative Investments. Certain conflicts of interest may arise within the Citigroup organization.

Conflicts of Interest

Hedge Funds may trade in esoteric securities, often in illiquid markets. In normal markets it is sometimes difficult to price these instruments, causing managers to estimate market values. In stressed markets this problem may be compounded, leaving investors with an imprecise understanding of the NAV of a multi-strategy portfolio. Valuations for investments for which market quotations are not available may at times be estimates, which may affect the amount of the Management and Incentive Fees.

Valuation Risk

Risk DefinitionRisk

VI. Hedge Funds

3838

What Are Funds Of Hedge Funds?

Funds of Hedge Funds ("Multi-Advisor Funds") invest in multiple single-manager hedge funds

• Multi-Advisor, Multi-Strategy funds invest in multiple managers across different investment styles

• Multi-Advisor, Single-Strategy funds invest in multiple managers all investing in the same strategy

Funds of Hedge Funds provide investors with diversified exposure to hedge funds through one investment

Funds of Hedge Funds often have lower minimums than single-manager hedge funds• Investors in Funds of Hedge Funds are often subject to additional management fees on top of the

management and performance fees owed to the underlying hedge fund managers

40 Act, Registered Funds of Hedge Funds generally allow accredited investors* to invest • However, the Funds of Hedge Funds must be suitable for the investor in light of his or her goals,

objectives, restrictions and risk tolerance

* Accredited Investors are individuals with $1 million in net worth or institutions with $5 million in assets

VI. Hedge Funds

3939

Strategy Performance Variation Provides Rationale For Multi-Strategy Funds Of Hedge Funds

Source: Hedge Fund ResearchNote: The colored square at the top of the page represents the strategy that delivered the best performance for that year. The other

strategies are shown in descending order of performance results.Past performance does not guarantee future results. Real results may vary. Investors cannot invest in an index

Annual Performance By Strategy

Distressed Securities (D)Equity Long/Short (E)Convertible Arbitrage (CA)Relative Value (RV)

Global Macro (GM)Event Driven (ED)Merger Arbitrage (MA)

VI. Hedge Funds

2007 3QYTD

E

GM

ED

RV

MA

D

CAGM

D

ED

E

RV

MA

CA

ED

E

D

MA

CA

RV

GM

E

ED

GM

MA

D

RV

CA

E

CA

MA

GM

RV

ED

D

E

ED

GM

D

RV

CA

MA

MA

CA

RV

E

ED

D

GM

CA

D

ED

RV

GM

MA

E

CA

GM

RV

D

MA

ED

E

D

ED

GM

E

CA

RV

MA

D

ED

E

RV

GM

MA

CA

E

D

ED

GM

RV

MA

CA

20061996 1997 1998 1999 2000 2001 2002 2003 2004 2005

4040

Funds Of Hedge Funds May Help Reduce Some of the Risks in Hedge Funds

A multi-advisor approach to hedge fund investing seeks to reduce total portfolio risk through:

• Manager diversification

• Strategy diversification (in multi-strategy funds)

• Active strategy allocation

• Manager Selection

• Due Diligence

• Risk management evaluation at the portfolio and single-advisor level

Notwithstanding the above, investing in Funds of Hedge Funds is speculative and involves significant risks that should be borne only by suitable, Qualified investors who can tolerate such risks

VI. Hedge Funds

4141

A Fund of Hedge Funds Manager Will Also Attempt To Manage Operational/Structural Risks

Domicile, registration, board of directors, legal structureLegal Documentation

Internal controls, trading, trading policies, mid/back office, valuation, prime broker, administration, audit, contingency plans

Operational Controls

Policies, process, systemsRisk Management

Investment strategy and process, style drift, performance, capacity, systems and data

Portfolio Management

Transparency, liquidity, fees, access and cooperation, capacity, concentration

Investment Factors

Redemption risk, funding risk, counter-party risk, leverage risk, portfolio liquidity

Liquidity/Leverage Management

Management team, ownership structure, staffing, business planInvestment Advisor

Topics AddressedArea Analyzed

VI. Hedge Funds

4242

The Real Estate Universe: Differences Between Real Estate and Traditional Investments

Real Estate

■ Internal Rate of Return objective*

■ Leverage (typically 0 to 75%)

■ Historically, low correlation with market indices

■ Less volatility compared to equities and fixed income

■ Physical asset

■ Relatively illiquid

■ Potential inflation hedge

Traditional Investments

■ Relative performance objective*

■ No leverage

■ Historically, high correlation with market indices

■ More volatility than real estate, even during periods of out performance

■ Financial asset

■ Highly liquid

■ Historically, vulnerable to inflation

VII.Real Estate

*There is no guarantee that these objectives will be met.

4343

The Real Estate Universe: Four Quadrants Of Investment Strategies

The universe of possible real estate related investment products falls into the following matrix:

Debt Equity

Public

Private

Commercial Mortgage Backed Securities (CMBS)

REIT Stocks

Publicly Traded Real Estate Property Companies

Real Estate Mutual Funds

Senior Loans

Mezzanine Debt

Open and Closed End Funds

Separate Account/Direct Investments

VII.Real Estate

4444

Various Real Estate Products Offer A Spectrum Of Risk/Return Options

Lower Risk/Lower Return Potential• Core, unleveraged properties in a commingled real estate fund

• Diversified across property types

Moderate Risk/Return Potential• Value added properties in a commingled real estate fund with leverage

Moderate Return/Higher Risk Potential• REITs (Real Estate Investment Trusts)

High Risk/High Return Potential• Opportunity fund investments with high leverage 65%-85%

• Speculative development (highest risk)

VII.Real Estate

4545

Commercial Real Estate Can Play An Important RoleIn an Investment Portfolio

Portfolio diversification• Historically, low correlation with other asset classes

Low volatility• Historically, has provided steady returns over the long-term

Attractive overall returns• Historically, has performed well vs. other investments

Commercial real estate differs from single family homes• Different drivers, different market conditions

Choices of investments• Risk/return trade-off in various real estate investments

Past performance does not guarantee future results. Real results may vary.

VII.Real Estate

4646

Risk Considerations

Results depend on the availability of real estate investments and the Manager's ability to identify and consummate such transactions. There can be no assurance that the Manager will be able to find attractive investments to invest all or substantially all of the Company's capital. In addition, the timing which an investor makes investments will have a significant impact on returns

Competition for Investments:

Many non-REIT real estate investments are illiquid, and are not listed on any exchange. Investments should generally be regarded as fixed and long term. Generally, there are no liquidity provisions and no mechanisms in place for sale of partial interests in non-realized real estate funds. There are often significant restrictions on transfer

Illiquid Investments:

Real estate investments may or may not include the use of floating rate leverage. Floating rate leverage increases the volatility of real estate returns, including increasing the potential loss of principal. Other risks related to interest rates include the risk associated with refinancing properties

Interest Rate Risk:

Most real estate investments employ leverage. Leverage has the effect of magnifying both gains and losses, including potential loss of principal

Leverage:

Real estate historically has experienced significant fluctuations and cycles in value and local market conditions may result in reductions in the value and the income associated with real property interests, including possible loss of principal investment

Real Estate Ownership:

VII.Real Estate

An investment in Real Estate can involve a high degree of risk. These risks may include:

4747

Alternative Investments

1. Performance Linked Products2. Leveraged/Arbitrage Products3. Principal Protected Products

Structured Alternative Investments

What Is A Structured Product?

Private Equity

BuyoutsMezzanine

Financial Assets

Real EstateBondsLoans

Managed Futures

CommoditiesOpportunistic

Passive

Hedge Funds

Relative ValueEvent-DrivenOpportunistic

VIII.Structured Products

SecuritizedProducts

ABSMBSCMOCBOCLO

Leveraged FundArbitrage Funds

4848

Types Of Structured Products

S&PHFI

Linked Note

of Share

Assets Liability

Performance Linked Products

Principal Protected

Note of Share

"Haircut"

Assets Liability

Principal Protected Products

"Haircut" Notes/Share

Assets Liability

Leveraged/Arbitrage Products

Investment products with a return linked to the performance of a basket of assets such as stocks, bonds, or hedge funds

• Usually liquid and do not employ leverage

• Performance based upon index

Investment products with principal protection and a return linked to the performance of a basket of assets

• Principal protected only if held until stated maturity

• Haircut based upon risk profile and sell triggers to convert into fixed income

• Principal protection limits upside/downside relative to index

Investment products that generate returns based on the spread between assets and financing costs

• Limited Liquidity• High Risk and potential for

High Return


Bonds/LoansEquity

Hedge FundsFOF

Other

Financing or Leverage

Bonds/LoansEquity

Hedge FundsFOF

Other

4949

How Principal Protection Works

Zero Method CPPI Hybrid (Option on CPPI)

Definite payoff formula known at inception

Dynamic allocation allows for increased participation when underlying investment is performing well

Combines benefits of Zero Method and CPPI plus can have a floor on trading allocation

Zero Coupon

Bond+ Option

Risky Asset

Cash Risky Asset

Zero Coupon

Bond+ Option

Cash Risky Asset

+ Cannot knock-out

- Liquidity and transparency issues make options on Alternatives Investment expensive

+ Flexible features such as contingent coupon, profit lock-ins, and built-in leverage

- Trading can knock out (investment is locked into zero coupons)

+ Allows higher initial allocations in low interest rate environments

- Hard to explain. Liquidity and transparency make options on Alternative Investment expensive


5050

Why Do Investors Purchase Structured Funds?

Customization• Can be customized to fit the unique requirements of individual investors

Yield Enhancement• Potential higher yields than market yields, if certain scenarios come true

Risk Allocation and Diversification• Exposure to diversifying market sectors in one packaged security

Principal Protection• Maybe repackaged as credit enhanced/Principal Protected product

Active Management• Managed with the objective of improving the risk/return profile of the investment


5151

Risk Considerations

An investment in a structured fund can involve a high degree of risk. Investors are advised to refer to the confidential Private Offering Memorandum for the specific investment for a more complete discussion of the risks involved, which may include:


Affiliates of Citigroup often act as the investment manager and as providers of other types of services to structured funds sold by Citigroup. Certain conflicts of interest may arise within the Citigroup organization


Structured funds utilize diverse, complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may at times be out of market favor for considerable periods, with adverse effects to the investment

Strategy Risk

Special investment techniques such as leveraging and investing in derivatives may result in significant losses

Specialized Trading

Structured funds may hold securities that trade in illiquid markets. Valuation procedures may be subjective in nature, may not conform to any industry standard and may not reflect the values which are ultimately realized. However, at any stage, valuations of these positions may affect management fees

Valuation

Structured funds typically use leverage in an effort to enhance returns. Leverage can have the effect of magnifying both positive and negative returns and could involve a loss of principal

Leverage

The liquidity of an interest in a structured fund may be limited. They are generally not readily marketable, sometimes not redeemable, and are transferable only in limited circumstances

Lack of Liquidity

5252

What Are Managed Futures

An alternative investment strategy that offers access to global futures markets through the use of professional money managers called Commodity Trading Advisors (CTAs)

CTAs are regulated in the U.S. by the Commodity Futures Trading Commission (CFTC), a government agency

CTAs must prepare disclosure documents highlighting required information prior to soliciting customer funds and are subject to periodic, on-site audits conducted by the National Futures Association, a self-regulatory body

CTAs use trading strategies and money management techniques to attempt to achieve profits and control risk

CTAs trade global markets including futures, options and forwards on traditional commodities, financial instruments and currencies

Due to the use of leverage a small change in market price of a futures contract can produce major gains or losses for a Managed Futures fund

Fees on Managed Futures funds are higher than on traditional funds

IX. Managed Futures

5353

Commodity Trading Advisors' (CTAs) Trading Style

CTAs have:• Ability to have long or short exposure

• Access to global markets with limited exchange rate risk

• Ability to potentially profit in inflationary/deflationary environments

• Liquidity/daily mark to market pricing of futures contracts

CTAs generally fall into one of two categories: technical or fundamental• Technical traders perform quantitative analysis on historical prices

− Technical traders can be further classified as either systematic or discretionary

− Systematic traders follow their proprietary systems almost exclusively; Discretionary traders interact with the technical signals generated

• Fundamental managers base market decisions on events which affect supply and demand

IX. Managed Futures

5454

Global Market Sectors

Currencies

British PoundEuroJapanese YenCanadian DollarSwiss FrancAustralian Dollar

Singapore DollarMalaysian RingittThai BhatCzech KronerMexican PesoU.S. Dollar IndexCrosses on all of above

Interest Rates

U.S. Treasury BondU.S. Treasury 10 yr. NoteU.S. 5 yr. NoteEurodollarMuni Bond IndexCanadian BondsCanadian B.A. Euro BundEuro Bobl

Euro ShatzEuro SwissFrench Notional BondBritish Long GiltBritish Short SterlingEuro YenJapanese BondsAustralian TbillsAustralian Notes/Bonds

Stock Indices

U.S. S&P 500Japanese NikkeiJapanese TOPIXAustralian All OrdsFrench CAC40German DAX

Hong Kong Hang SengBritish FTSEEOE IndexNYSE Stock IndexKorean Kospi

Metals

GoldSilverCopperPlatinumPalladiumTinLeadZincNickelAluminum

Grains/Ags

SoybeansSoybean OilSoybean MealCorn WheatAzuki BeansFlaxseedRaw SilkRapeseed

Energy

Crude OilHeating OilUnleaded GasNatural GasBrent CrudeLondon Gas Oil

Livestock/ Softs/Others

SugarCocoaLondon CocoaCoffeeLondon CoffeeLumberOrange JuiceCotton

Live CattleLive HogsPork BelliesFeeder CattleCrude Palm OilCanolaCRB IndexRubber

Representative Liquid Futures Contracts

IX. Managed Futures

For Illustrative Purposes Only

5555

Managed Futures Have Low Historical Correlation With Traditional Investments

CTAs can go both long and short with equal ease, thereby participating in rising or falling markets, although favorable results are dependent on correct market judgment

CTAs can diversify their portfolios in over 100 financial and commodity futures markets around the world

CTAs trading models are dynamic: models can generally react relatively quickly to market moves and take a position

IX. Managed Futures

5656

Source: Citigroup Managed Futures LLC Performance Analysis. See Appendix for definitions of indices. Investors cannot invest in an index. Past performance is not necessarily indicative of future results. Real results may vary.

Historical Low Correlation With Traditional InvestmentsJanuary 90 – December 07

Historically, Managed Futures Have Performed Well During PeriodsOf Stress in the Traditional Markets

IX. Managed Futures

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

S&P 500 Index

Sep '00 - Mar '01

Aug - Sep1998

Mar - Jun1994

Aug - Dec1990

Apr '02 - Mar '03

-6% -4%-9%

-23% -25%

+11% +9%+15% +19%

+8%Managed Futures Index

Managed Futures (CISDM CTA-$)

Stocks(S&P 500)

Mid-East Oil Crisis

Global Bond Market Reversal

International Market

Uncertainty

Corporate Accounting Concerns

Tech Fallout

5757

Annual Return of Managed Futures vs. Stocks

Managed Futures Index: CISDM Index. NASDAQ: NASDAQ Composite Index. Global Stocks: MSCI World Index. HFR Comp: HFRI FundWeighted Composite Index. US Bonds: Lehman Government Bond Index. Global Bonds: JP Morgan Global Government Bond Index.Source: Citigroup Managed Futures LLC Performance Analysis. See Appendix for definitions of indices. Past performance does not guarantee future results. Real results may vary. Investors cannot invest in an Index.

IndexAvg. Rate of Return (%)

Max Drawdown (%)

Standard Deviation (%)

Semi Deviation (%)

January 1990 – December 2007

IX. Managed Futures

7.276.62-11.4213.81HFR Comp

18.5219.69-48.267.93GSCI

15.5013.76-46.328.09Global Stocks

6.006.19-8.137.30Global Bonds

4.734.28-5.767.21US Bonds

25.5623.94-75.0410.29NASDAQ

15.4313.73-44.7110.54S&P 500

8.629.60-10.6910.16Managed Futures

5858

Risk Considerations

Investing in Managed Futures can involve a high degree of risk. These are speculative securities. Diversification does not eliminate market risks. Before you decide to invest, read the entire prospectus carefully. Investors must be aware of the following risks:

IX. Managed Futures

The general partner at any time may select and allocate the Fund's assets to advisors that are not described in the prospectus. You may not be advised of such changes in advance. You must rely on the ability of the general partner to select advisors and allocate assets among them

Manager Risk

You will be taxed on your share of each Fund's income, even though the Fund does not intend to make any distributions

Taxation

The advisors' trading strategies may not perform as they have performed in the past. The advisors have from time to time incurred substantial losses in trading on behalf of clients

Strategy Risk

The Funds will not provide any benefit of diversification of your overall portfolio unless it is profitable and produces returns that are independent from stock and bond market returns

Diversification Benefit is Uncertain

The Funds may be subject to conflicts of interest: the general partner and broker may be affiliates; each of the trading advisors, the commodity broker and their principals and affiliates may trade in commodity interests for their own accounts; and your Smith Barney financial consultant will receive ongoing compensation for providing services to your account


Your ability to redeem units is limited. In many cases, you may only redeem units after an initial three-month holding period and then only on a monthly basis

Lack of Liquidity

Regardless of trading performance, the Funds will incur fees and expenses, including brokerage and management fees. Substantial incentive fees may be paid to one or more trading advisors even if the Fund experiences a net loss for the full year

Fees & Expenses

Trading of commodity interests is speculative, volatile and involves a high degree of leverage. A small change in the market price of a contract can produce major losses for the Fund. You could lose all of your investment

Leverage

5959

Summary

Alternative investments include a broad set of asset classes that span the spectrum of:• Risk

• Return

• Liquidity

The addition of alternatives has the potential to enhance the performance of a portfolio of traditional assets

We believe that an asset allocation-led approach is the best way to analyze and understand the trade-offs and implications of an allocation to any alternative investment

Alternative Investments are speculative investments intended for investors with sufficient knowledge and experience who are willing to bear the high economic risk of the investments

CitigroupAlternativeInvestments

6060

Referenced Indices

HFR Indices are compiled by Hedge Fund Research, Inc. ("HFR"), an industry service provider. They are based on the performance of hedge funds in various strategies as reported by the hedge fund managers to HFR. All are net of all fees, denominated in U.S.$ and equal-weighted. Results for funds that go out of business are included in the appropriate index until the date that they cease operations. The information underlying the indices and the classification of the underlying funds have not been independently verified by either HFR or Citigroup, and neither HFR nor Citigroup make any representation as to their accuracy. Past performance does not guarantee future results

The specific indices used in this document are comprised of hedge funds following the investment strategies as described below• HFR Equity Hedge Index (Long/Short Equity): Equity Hedge investing consists of a core holding of long equities hedged at all times with short sales of

stocks and/or stock index options

• HFR Convertible Arbitrage Index (Convertible Arbitrage): Convertible Arbitrage involves purchasing a portfolio of convertible securities, generally convertible bonds, and hedging a portion of the equity risk by selling short the underlying common stock

• HFR Merger Arbitrage Index (Merger Arbitrage): Merger Arbitrage, sometimes called Risk Arbitrage, involves investment in event-driven situations such as leveraged buy-outs, mergers and hostile takeovers

• HFR Equity Market Neutral Index (Equity Market Neutral): Equity Market Neutral investing seeks to profit by exploiting pricing inefficiencies between related equity securities, neutralizing exposure to market risk by combining long and short positions

• HFR Macro Index (Global Macro): Macro involves investing by making leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities

• HFR Fixed Income Arbitrage Index (Fixed Income Arbitrage): Fixed Income Arbitrage is a market neutral hedging strategy that seeks to profit by exploiting pricing inefficiencies between related fixed income securities while neutralizing exposure to interest rate risk

• HFR Statistical Arbitrage Index (Statistical Arbitrage): Statistical Arbitrage utilizes quantitative analysis of technical factors to exploit pricing inefficiencies between related equity securities, neutralizing exposure to market risk by combining long and short positions

• HFR Distressed Securities Index (Distressed Debt): Distressed Securities strategies invest in, and may sell short, the securities of companies where the security's price has been, or is expected to be, affected by a distressed situation

• HFR Emerging Market Index (Emerging Markets): Emerging Markets funds invest in the securities of companies or the sovereign debt of developing or 'emerging' countries

• HFRI Indices (Blended): Monthly Performance Indices broken down into 37 different categories by strategy

• HFRI FOF Index: Listing of Top 50 FOF rankings by Rate of Return, Sharpe Ratio, and Standard Deviation Sorted by 1, 3, and 5 year intervals

Appendix

6161

Referenced Indices (Cont.)

• LIBOR: London Interbank Offered Rate, the rate that the most creditworthy international banks dealing in Eurodollars charge each otherfor loans. Popular reference rate for floating rate obligations

• Lehman Aggregate Bond Index (LABI): A market-weighted, intermediate-term bond index of over 6,500 intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities.

• Lehman Government Bond Index (LBBI): Comprised of fixed rate debt issues rated investment grade or higher by Moody’s, Standard & Poor’s or Fitch and includes interest. All issues have at least one year to maturity and an outstanding par value of at least $100 million.

• JP Morgan Global Government Bond Index: Consists of fixed rate domestic government bonds with a maturity of greater than one year and encompasses 13 countries’ instruments. It is calculated in U.S. dollars.

• S&P 500: A capitalization-weighted index of 500 U.S. large cap stocks• Morgan Stanley Capital International World: An index consisting of approximately 1,500 stocks in 23 countries globally and

representing a significant portion of the total market capitalization in those countries• NAREIT (REITs): Represents the investment performance of all publicly traded REITs as compiled by the National Association of

Real Estate Investment Trusts• NCREIF Index: The NCREIF Index is an index of the quarterly total returns of the commercial real estate properties held for tax-exempt

institutional investors by the members of NCREIF (National Council of Real Estate Investment Fiduciaries)• Venture Economics Private Equity Universe (Private Equity): Represents the time-weighted returns of U.S. Private Equity funds• CISDM Multi-Advisor (Multi-Advisor CTA): A dollar-weighted index of multi-advisor funds based on information as reported to MAR, an

industry research firm (formerly called the MAR or Zurich Multi-Advisor index)• CISDM Single-Advisor (Single-Advisor CTA): A dollar-weighted index of single-advisor funds based on information as reported to MAR,

an industry research firm (formerly called the MAR or Zurich Multi-Advisor index) • The NASDAQ Composite Index: NASDAQ Covers 4,500 stocks traded over the counter. It represents many small company stocks but

is heavily influenced by about 100 of the largest NASQ stocks. It is a value-weighted index calculated on price change only and does not include income

Appendix

6262

Glossary

A quantitative measure of volatility of a security or strategy relative to a market index. An investment with a beta less than 1.0 is less volatile than the market while an investment with a beta greater than 1.0 is more volatile than the market

Beta:

The use of various financial instruments, including credit lines and options, to attempt to enhance returns without increasing investment

Leverage:

A measure of risk often expressed as the percentage loss of a fund's or strategy's highest value to its lowest value within a specific time period

Drawdown:

A measure of the degree to which two variables move in the same direction with the same impact on performance, measured in a range of -1.0 to 1.0. A correlation of -1.0 implies that the variables move inversely with one another while a correlation of 1.0 implies that the variables move in exactly the same manner. A correlation of zero implies that there is no relationship between the movements of the variables (therefore implying perfect diversification)

Correlation:

A mathematical value indicating an investment's excess return relative to a benchmark. Measures a manager's value added relative to a passive strategy, independent of the market movement

Alpha:

Note: The definitions described above are not a complete listing of terms and are provided to define key words used in this document

Appendix

6363

Glossary (Cont.)

A statistical technique that corrects for the valuation biases in reported hedge fund performance

Unsmoothing:

A measure of long-term stability among two or more investments' risk, return, and correlation characteristics

Robustness:

Reported hedge fund returns that are artificially consistent over timeSerial Correlation:

A measure of risk-adjusted return calculated by dividing an investment's return over the risk-free rate (i.e., Treasury bill yield) by the investment's standard deviation

Sharpe Ratio:

A measure of the variation of returns around the mean return. Standard deviation is the most widely used approximation of the risk of an individual investment or portfolio

Standard Deviation:

A mathematical process that seeks to maximize expected portfolio return for a targeted level of risk, or minimize expected risk for a targeted level of return

Optimization:

Note: The definitions described above are not a complete listing of terms and are provided to define key words used in this document

Appendix

introduction to alternative investments - ksu foundation

Documents