Postcard from the Hedge

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EFG Asset Management

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Postcard from the Hedge Q1 2013

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For Internal Use Only

Postcard from the Hedge

For Internal Use Only

EFG Asset Management

Postcard from the Hedge By popular demand, we are pleased to share with you our first quarterly publication discussing our thoughts on the hedge fund industry. We will also share some details on the EFG Hedge Fund List and highlight the merits of our leading hedge fund managers.

We hope you will find this review and ‘blog’ of sorts practical, interesting and useful for thinking through the hedge fund allocations of your clients. As you know, we have a dedicated hedge fund team at EFG and are here to help you navigate the various options you may be considering, depending on the needs and objectives of your clients.

We appreciate your support and look forward to your thoughts so as to make our offering more interesting and useful for your clients.

Meet the Hedge Fund Research Team fundsolutions@efgam.com

2

Matias Ringel

Tim Foley

Christophe Campana

Matias is Head of Funds Research for EFG Asset Management. He is responsible for all fund research and allocation functions related to EFG Asset Management, with a key focus on hedge funds. He has been at EFG since 2003.

Prior to EFG Asset Management Matias worked at Salomon Brothers Inc (now part of Citigroup) in its Corporate Finance and Equity Capital Markets divisions. Matias holds an MA in International Economics and Finance and a BA in Economics from Brandeis University in Massachusetts. He is a CFA Charterholder since 2006.

Tim Foley is a Senior Research Analyst at EFG Asset Management and his main responsibility is performing due diligence on equity-related strategies. Before joining EFG in 2010, Tim was a consultant in the Alternative Investments division of Credit Suisse Securities (USA) LLC, focusing on hedge funds as well as private equity and real estate strategies. Prior to Credit Suisse, Tim was an Analyst at Archery Capital, LLC, a fund of hedge funds and family office, where he concentrated on equity strategies. Tim holds a B.A. in Economics from Hamilton College in Clinton, New York.

Christophe Campana is a Senior Research Analyst at EFG Asset Management covering Macro and CTA hedge fund strategies.

Before joining EFG in 2009 he was a member of the hedge funds trading team at HSBC Private Bank in Geneva. Christophe has worked in the financial sector since 2006.

Christophe earned a master degree in Molecular Biology from Geneva University. He is a CAIA Charterholder since 2009 and is a CFA Level III candidate.

Claire Hsing Claire Hsing is a Research Analyst at EFG Asset Management, supporting senior research analysts covering credit, convertible and distressed strategies as well as credit long only strategies. Prior to joining EFG, Claire was an analyst with the Alternatives Distribution Group at Citigroup, conducting due diligence on third party funds and raising capital for private equity, infrastructure and hedge funds. Claire holds a B.S. in Finance and a B.S. in Management from New York University’s Stern School of Business

Postcard from the Hedge

For Internal Use Only

Introduction

While hedge funds have fallen out of favour in the high net worth and private banking world, they have become pension fund and endowment / foundation favourites. These institutional investors have helped significantly in terms of hedge fund inflows, which amounted to $34.4 billion in 2012 and resulted in hedge fund AUM reaching $2.25 trillion at year end, a record for the asset class according to Hedge Fund Research, Inc. (“HFR”).

Chart 1 Estimated Strategy Composition by Assets Under Management Q4 2012 (Q4 2012 Total Hedge Fund AUM = $2.25 trillion)

Relative Value 26%

Event-driven 25%

It is interesting to see that the landscape has not only changed in terms of investor base, but also in terms of the strategy mix. We know that 2012 was undoubtedly the year of credit. Led by ABS, a diverse mix of credit funds did relatively well and seemed to be an investor favourite as it helped some institutions with respect to the now infamous unfunded pension liability hole.

To this effect full year hedge fund performance and capital inflows were led by a group of managers that comprise the fixed income relative value (RVA) bucket (in HFR parlance).

This resulted in RVA becoming the largest strategy area of hedge fund capital allocation with over $600 billion as of December 31, 2012. RVA displaced equity hedge funds for the first time since 1991, a milestone.

Historically many investors have seen hedge funds as a proxy for equities, but developments like these are rapidly showing the contrary – currently, hedge funds are functioning more as an actual proxy for fixed income strategies, so that the whole debate about alpha and potential under performance is quickly shifting to one of diversification, consistency and lower volatility. This is how we see it, and how we have focused the EFG manager selection process over the last two years.

We have divided this publication into four short sections (who has time to read a lot these days?). The first is a review of our Hedge Fund List highlighting composition, changes, conferences we have attended and a brief mention of what is in the research pipeline. Next, we summarize recent hedge fund strategy performance and asset allocation developments, combining our thoughts with those of industry analysts we respect. The third section is a ‘gossip’ column of sorts with a relevant undertone – as an example we highlight managers and regulatory developments of interest. The final section highlights our current ‘best ideas’ and showcases a manager we have on our list that we like from both a top down and bottom up perspective.

Equity Hedge 27%

Macro 22%

Source: HFR Global Hedge Fund Industry Report (Year End 2012)

Chart 2 Estimated Strategy Composition by Assets Under Management Q4 1990 (Q4 1990 Total Hedge Fund AUM = $38 billion)

Event-driven 10%

Relative Value 14%

Equity Hedge 37% Macro 39%

Source: HFR Global Hedge Fund Industry Report (Year End 2012)

3

Postcard from the Hedge

For Internal Use Only

EFG Hedge Fund List Overview & Conferences Attended

The EFG Hedge Fund List contains single strategy hedge funds and fund of hedge funds on which the team has completed due diligence and has generally deemed appropriate for investment purposes (details on INVEST).

Hedge Fund Research Pipeline Aquila RP 12 - Macro Systematic (UCITS) GAM Star Global Rates UCITS - Macro Discretionary SEG Partners - Equity Long / Short (UCITS) Centaurus Event Opportunities - Global Event Driven Partners Group Global Value SICAV - Private Equity

Added to EFG Fund List Jun-12

Candlewood Structured Credit, Arb: Mortgage

Jul-12

Schroder GAIA CQS Credit (UCITS), Arb: Credit L/S

Oct-12

Verrazzano European Opportunities, Equ: L/S

Oct-12

Permal Fixed Income Holdings, FoF:Specialist

Dec-12

dbX8 Global Macro (MKP Opportunity), Macro Discretionary

Jan-13

Asian Credit Hedge, Arb:Credit L/S

Jan-13

Schroder GAIA Egerton Equity (UCITS), Equ: L/S

Conferences Attended by Hedge Fund Research Team Sep-12

Morgan Stanley Global Hedge Fund Conference

CT, USA

Sep-12 UBS Global Hedge Fund Conference

NY, USA

Oct-12

Millennium International Investor Day

NY, USA

Oct-12 CS European Managers Conference

NY, USA

Oct-12

Barclays Hedge Fund Symposium

NY, USA

Oct-12

GS Quantitative Strategies Forum

NY, USA

Oct-12

GS Asian Hedge Fund Conference

Singapore

Removed from EFG Fund List

Dec-12 JPM Healthcare Panel

NY, USA

Jun-12

Chilton Natural Resources, Equ:L/S

Dec-12 Barclays Liquid Strategies Forum

NY, USA

Jul-12

Sloane Robinson Asia, Equ L/S

Dec-12 Paulson Investor Day

NY, USA

Jul-12

Oceanic Hedge Equ L/S

Dec-12 GS International Managers Conference

NY, USA

Jul-12

EFG FP Managed Futures, Trad: Systematic

Sep-12

Tudor Tensor, Trad: Systematic

Oct-12

7x7 Offshore, Equ L/S

Oct-12

Amiya GEO, Equ L/S

Nov-12

Nuwave, Trad: Systematic

Nov-12

GC Moore Emerging Markets, Equ: L/S

Dec-12

BH Global, FoF: Generalist

Jan-13

New Capital Dynamic Trading, Trad: Systematic

Chart 4 Hedge Fund List Strategy Arb: Convertible Arbitrage; 2 Arb: Credit long/short; 4 4%

9%

Arb: Distressed long/short; 3 7%

Arb: Fixed Income arbitrage; 2 Arb: Merger Arbitrage; 1

5%

9%

Arb:Mortgage Arbitrage; 2

4%

Arb: Special situations; 5

2%

5%

Composition of Hedge Fund List (January 2013)

Arb: Volatility Discretionary; 2

4%

Equ: L/S: high exposure; 9

11

Equity Long / Short Funds

8

Global Macro Funds

6

CTA Funds

5

Special Situations Funds

4

Credit Long / Short Funds

3

Equity Market Neutral Funds

Trad: Macro (generic); 5

2

Distressed Funds

Trad: Systematic (generic); 5

2

Fixed Income Arbitrage Funds

2

Convertible Arbitrage Funds

2

Mortgage Arbitrage Funds

1

Merger Arbitrage Fund

46

Single Manager Funds (Including 8 UCITS Funds)

6

Internal Fund of Funds

5

External Fund of Funds

57

Total Number of Funds on EFG Hedge Fund List

10%

Equ: Market Neutral; 3

Perella Weinberg Xerion added to Alert List

Jul-12

Man AHL Trend UCITS added to Alert List

Sep-12

Moore Macro managers added to Alert List

Oct-12

Man AHL Trend UCITS removed from Alert List

Dec-12

VR Global added to Alert List

4

FoF: Multistrategy unlevered; 3

4%

5%

FoF: Specialist; 6 5%

Trad: Commodity Discretionary; 3

15%

4%

Chart 4 Hedge Fund List Liquidity 0% 4%

2%

11%

37%

Annual; 0 Semiannual; 1 Quarterly; 21 Monthly; 27 Weekly; 6

Alert List Activity Jul-12

Equ: L/S: low exposure; 2

8%

Daily; 2

46%

Source: Manager data and EFG calculations Number of funds included in Legend

Please note: This is not a recommendation to purchase or solicitation of an offer to purchase any specific security.

The securities referenced may not be suitable for purchase by a particular client.

For Internal Use Only

Postcard from the Hedge

Chart 5 Average correlation among risky assets

Q4 2012 Hedge Fund Market Developments

Table 1 Asset Class Performance

2008

2009

2010

2011

2012

Global Bonds 5.24%

Global Equities 30.81%

Commodities 17.44%

Global Bonds 7.84%

Global Equities 16.39%

Risk Free Rate 0.44%

Commodities 23.46%

Global Equities 12.44%

Risk Free Rate 0.30%

Hedge Funds 4.81%

Hedge Funds -21.37%

Hedge Funds 11.47%

Global Bonds 6.54%

Global Equities -4.98%

Global Bonds 4.22%

Commodities -36.01%

Global Bonds 5.93%

Hedge Funds 5.70%

Hedge Funds -5.56%

Risk Free Rate 0.21%

Global Equities 30.81%

Risk Free Rate 0.44%

Risk Free Rate 0.44%

Commodities 23.46%

Commodities 23.46%

Hedge Funds: HFRI Fund of Funds Composite Index Commodities: CRB Commodity Price Index Risk-Free Rate: Quarter-end reading of USD one-month LIBOR Global Equities: MSCI World Total Return Index Global Bonds: Barclays Aggregate Bond Index Source: Bloomberg,HFR, EFG calculations

Source: Bloomberg

ff Hedge funds turned in another underwhelming year when compared to equity indices. However, we are currently viewing hedge funds in the context of reallocations from fixed income, commodities and currencies. When compared against these asset classes, hedge funds did outperform overall in 2012. ff Getting the macro picture right was the determinant driver of performance for most hedge funds in 2012. Macro funds suffered as most were fundamentally bearish and CTAs did even worse as trendless markets cannot be expected to favour trend followers. ff In equity strategies, directionality or beta was helpful for returns while market neutral managers generally suffered through the macro-driven environment and underperformance of value. ff Corporate activity picked up in Q4, supporting our positive view on event driven strategies. We believe that event driven managers will be less sensitive to market moves due to idiosyncratic risk and can also extract alpha from multiple asset classes.

Table 2 HFRX Index Performance Index / Strategy HFRX Global Hedge Fund Index HFRX Equity Hedge Index HFRX Equity Market Neutral HFRX Event Driven HFRX Distressed Securities HFRX Macro HFRX Systematic Diversified HFRX Convertible Arbitrage HFRX Fixed Income - Asset Backed HFRX Volatility Index HFRX Emerging Markets Index

Dec-12 H2 2012 0.9% 2.3% 0.4% 3.6% 0.1% 0.3% 1.3% 2.9% 0.5% -2.0% 0.7% 0.8% 0.9% -2.9% 1.1% 3.1% 0.9% 10.5% 0.3% 5.4% 2.5% 3.7%

2012 2011 2010 2009 2008 3.5% -8.9% 5.2% 13.4% -23.3% 4.8% -19.1% 8.9% 13.1% -25.5% -4.7% -2.9% 2.6% -5.6% -1.2% 6.0% -4.9% 2.0% 16.6% -22.1% 0.9% -8.0% 8.3% -5.6% -30.7% -1.0% -4.9% -1.7% -8.8% 5.6% -7.4% -1.8% 6.0% -9.0% 31.6% 7.2% -3.1% 8.8% 42.5% -58.4% 23.4% 14.3% 15.2% 25.3% -2.0% 9.6% 1.4% -4.4% -3.2% 2.0% 6.9% -5.9% 17.1% 24.0% -25.1%

ff A few of our managers have mentioned a progressive complacency in the quality of debt issuance, with covenant lite structures and pay-in-kind debt once again becoming commonplace. We are also witnessing the return of some side pocketing, although it is difficult to point to a trend at the moment. In a low default environment, the risk does not seem imminent, but the compounding effect can be quick and it is better to be safe than side-pocketed. ff We feel there is still value in ABS, directly through collateral based investing and indirectly or even as a hedge to bullish developments in mortgage derivatives.

Buyers now understand collateral better and many good teams are in place to evaluate the way in which bonds return capital as payback mechanisms differ. The chart below shows a rolling correlation of daily returns among MSCI World, DXY (inverse), GSCI, EM FX, MSCI EM and US HY. We believe that in the near term, intelligent investors will be looking far more at cross asset correlation opportunities. Hedge funds tend to have more consistent returns when volatility exceeds correlation, but the last two years have shown the opposite trend. ff Equities are more interesting to us as we move into 2013, given the macro tailwinds and lower correlations.

These developments point to prices resulting more directly from fundamentals rather than sentiment, a necessary condition for stock pickers.

Source: HFR online and EFG calculations

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Postcard from the Hedge

For Internal Use Only

Table 3 Q1 2013 EFGAM Hedge Fund Asset Allocation

Distressed

Emerging Markets

Equity Long / Short

Equity Market Neutral

Event Driven

Fixed Income Arbitrage

Global Macro

Systematic Trading

Volatility & Convertible Abitrage

Positive

Credit

Strategy Outlook

Negative

q

q

q

q

q

q

q

q

q

q

Total

Equal Weight

10%

10%

10%

10%

10%

10%

10%

10%

10%

10%

Outlook Adjustment

-4%

+2%

+2%

+2%

0%

+2%

+2%

-4%

-4%

+2%

Target Weight

6%

12%

12%

12%

10%

12%

12%

6%

6%

12%

Neutral

100%

100%

Source: EFG Asset Management research – December, 2012

Q4 2012 Hedge Fund Market Highlights

An insider trading investigation that started in 2010 has seemed to hone in on Steven A Cohen and his eponymous hedge fund, SAC Capital. The latest twist involves several 2008 trades in healthcare companies that allegedly netted the firm some $300 million. Last we heard, SAC may pay out some $1 billion in client redemptions for Q4 and will also raise bonuses in an attempt to retain talent. Insider trading cases have ballooned in size and quantity over the past two years. The SEC and DoJ have used aggressive tactics in gathering data and have recently received favourable judgments in many instances. A potential casualty in 2012 was Diamondback Capital Management, which closed at year-end after receiving redemption requests for some 25% of assets. While Diamondback’s performance had been lagging, a series of insider trading investigations likely made the position intolerable for many investors.

Greg Coffey of Moore Capital called it quits in October after nearly three years of sub-par performance and an asset base that has fallen some 75%. This is Coffey’s second contentious departure – the first being from GLG in 2008 following poor performance that year and ill-timed investments in less liquid securities.

John Paulson’s Advantage hedge fund posted another poor year in 2012, falling 14.2% on ill-timed bets on gold miners and shorts in rallying European equity and bond markets. The same fund was down by 35% in 2011, sparking rumours of a shut down, though with a massive investment by Paulson and his employees, the fund and firm will likely be around for a time.

Blue Mountain Capital raised $1.5 billion for a fund that will invest in structured corporate credit, including ABS. Such strategies have seen huge inflows in 2012 as investors chase one of the best performing strategies for the past few years.

Frere Hall, run by former Goldman Sachs MD and energy trader Taimur Hassan, has raised $400 million since launching in July, 2012.

Crackdown The US is pursuing insider-trading cases, with twice as many individuals sued by the SEC or charged by prosecuters in 2012 than in 2008.

56

96

67

104

125

2008

2009

2010

2011

2012

Source: Bloomberg analysis of SEC and Justice Department data through Dec, 14.

Hedge Fund Best Ideas (HFBI)

BlueMountain also helped JP Morgan unwind its ‘London Whale’ highly unprofitable credit derivatives trade as the firm had taken the other side of the trade.

While we believe that all of our managers have earned their spot on the Hedge Fund List, some are “more equal than others” in Orwellian parlance. This is with respect not only to manager characteristics, but also to strategies that may be more or less favoured based on our strategy outlook. We feel that of the 46 single manager hedge funds on our list, the ten funds listed below deserve an honourable mention and should be considered our Hedge Fund Best Ideas (FBIs) for the quarter.

William Siebold, formerly head of Soros’ distressed unit, will start Recipero Capital in 2013 and hopes to raise $800 million to invest in European distressed opportunities.

Although we in no way are giving any assurances on future performance, we feel the names above are most appropriate in light of our current asset allocation views.

6

Postcard from the Hedge

For Internal Use Only

Table 4 FBI List (Hedge Funds) Positive Neutral Negative

Fund Name

BlueMountain Long Short Credit Brummer & Partners Nektar Fund VR Global Offshore Fund

EFGAM Q1 2013 Strategy Outlook

Credit

Annualized since Fund Inception

Annual Fund Returns, Net of Fees

Redemption Terms Returns

Volatility

2012

2011

Max Drawdown

Sharpe (0%)

Sortine (0%)

2010

M/30

11.7%

4.3%

7.8%

3.8%

9.6%

-3.0%

2.7

5.0

FI Arbitrage

M/5

13.1%

7.3%

7.5%

5.7%

15.7%

-13.6%

1.8

3.8

Distressed

Q/45 - 1 yr soft lockup (4.5% fee)

23.4%

15.3%

20.7%

3.5%

54.0%

-48.3%

1.5

2.1

Egerton European

Equity L/S

M/30 + UCITS

15.6%

10.4%

13.7%

-4.0%

11.3%

-29.2%

1.5

2.8

Litespeed Offshore Fund

Event Driven

Q/45 - 1 yr soft lockup (5% fee)

12.2%

9.3%

21.9%

4.5%

16.8%

-28.8%

1.3

2.0

Canyon Balanced Fund

Event Driven

Q/90

14.5%

11.4%

20.5%

-4.6%

13.4%

-30.1%

1.3

2.0

BG Master Fund

Vol Arbitrage

M/60

7.5%

6.4%

8.5%

-4.8%

9.9%

-22.7%

1.2

1.7

Waterstine Market Neutral

Convertible Arbitrage

Q/45 - 1 yr soft lockup (5% fee)

10.0%

10.5%

11.1%

0.9%

6.1%

-17.6%

1.0

1.6

Force Capital II

Equity L/S

Q/45 1 yr lockup

10.8%

13.1%

18.2%

-7.3%

20.4%

-25.0%

0.8

1.4

Crabel Class A Multi-Product Program

Systematic Trading

M/5

12.2%

16.5%

15.2%

1.7%

9.6%

-16.8%

0.7

1.7

Source: EFG Asset Management, Manager Data

SPOTLIGHT: Litespeed Offshore Fund (Event Driven)

Litespeed was founded in 2000 by Jamie Zimmerman (ex Oppenheimer Prop Desk, over 25 years of investing experience, originally trained as a lawyer). Structure/ Terms: Cayman Islands domiciled master / feeder fund; Quarterly redemptions with a 45 day notice period.

Top Down We turned positive on Event Driven managers in Q2 2012 and remain positive now.

Event Driven

Outlook We foresee increased deal volumes (and potentially spreads) as firms with large cash balances search for top line growth though spin-offs, buy backs and restructurings are becoming increasingly popular, sometimes initiated by activists. The inherent long bias of the strategy is partially offset by event risk associated with each investment.

ff The fund is currently overweight distressed investments and special situations, with less exposure to M&A and post re-organization equities. ff The fund’s returns have benefited from its multiple areas of expertise. Stressed and distressed investments performed most strongly in 2012. ff Since launch, Litespeed has outperformed peers and broad measures of equity market performance ff Since launch, Litespeed has exhibited a beta of 0.33 to equity markets while maintaining a Sharpe Ratio of above 1.0 (assuming a 0% risk free rate).

Investment Highlights

Highlighted Risks

ff Long track record has resulted in a stable investor base and AUM of $1.4 billion.

ff Fund has a low hedge ratio, preferring cash holdings to short investments.

ff Core strengths are midcap equity special situations, merger arbitrage and global credit.

ff Fund issued a side pocket post 2008 and has been actively working on the remaining position.

ff Fund has generated alpha throughout market cycles and has shown a keen ability to shift between equity and credit. ff Team possesses deep understanding of capital structure, allowing it to identify best source of alpha in any investment scenario. ff Litespeed has successfully shifted among strategies depending on the prevailing opportunity set.

7

Postcard from the Hedge

For Internal Use Only

Chart 7 Historical Attribution

100%

8.00%

90%

6.00%

80%

4.00%

M&A

Distressed

Post Reorg Eq

Hedges

Sep-12

Jan-12

Sep-11

Jan-11

May-12

Jun-12

Nov-12

Jan-12

Aug-11

Oct-10

Mar-11

May-10

Jul-09

Dec-09

Feb-09

Sep-08

Apr-08

Jun-07

Nov-07

Jan-07

Source: Litespeed

Special Sits

May-11

Special Sits

0%

Sep-10

10%

-8.00% -10.00% Jan-10

M&A

May-10

20%

-6.00%

Sep-09

Distressed

Jan-09

30%

-4.00%

May-09

Post Reorg Eq

Sep-08

40%

0.00% -2.00%

Jan-08

50%

Single Name Shorts & CDS Hedges

May-08

60%

2.00%

Sep-07

Cash

Jan-07

70%

May-07

Chart 6 Historical Exposures

Single Name Shorts & CDS

Source: Litespeed

Table 5 Litespeed Offshore Returns (net of fees)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year 2001 1.0% 0.6% 0.0% 2.0% 4.6% 5.0% 1.3% 0.6% -4.9% 6.1% 2.4% 2.6% 23.0% 2002 3.6% -2.3% 2.1% 0.9% 0.2% -1.3% -9.7% -0.3% -1.8% 1.4% 5.7% 2.4% 0.1% 2003 1.8% 1.5% 1.6% 5.2% 5.7% 3.0% 3.5% 1.0% 4.1% 3.1% 3.0% 4.1% 44.6% 2004 4.3% 0.0% 2.0% 0.1% -1.2% 2.3% -0.7% 0.4% 0.5% 0.3% 3.1% 2.7% 14.5% 2005 0.6% 0.8% -0.5% -0.4% -3.1% 0.3% 1.8% 0.3% 2.2% -1.5% 2.0% 1.0% 3.4% 2006 6.1% -1.2% 3.2% 1.9% 0.2% 0.0% -1.2% 0.0% 0.7% 2.9% 4.9% 1.9% 20.9% 2007 2.6% 1.2% 1.7% 3.5% 1.5% -0.9% -3.1% -2.2% 1.3% 1.1% -4.0% -2.1% 0.3% 2008 -1.6% 2.2% -3.5% 2.5% 2.5% -3.2% -1.8% -1.5% -8.7% -3.7% -3.4% -2.9% -21.3% 2009 2.9% 0.3% 2.6% 3.4% 1.7% 3.0% 2.3% 1.9% 2.6% 0.3% 0.0% 3.2% 27.0% 2010 0.6% 1.0% 3.8% 4.0% -5.1% -2.2% 3.0% -1.9% 4.6% 3.3% 1.4% 3.6% 16.8% 2011 2.3% 3.0% 1.3% 2.7% -1.5% -1.4% 0.5% -4.1% -5.8% 5.2% 1.1% 1.6% 4.4% 2012 3.2% 3.7% 3.3% 1.7% -3.7% 2.7% 2.6% 1.8% 1.4% 0.3% 0.4% 2.8% 21.9%

Source: Litespeed data, HFR, EFG calculations

Please note: This is not a recommendation to purchase or solicitation of an offer to purchase any specific security. The securities referenced may not be suitable for purchase by a particular client.

Contact Matias Ringel | Head of Hedge Fund Research T +12126092557 E matias.ringel@efgam.com

8

HFRX HFRX Global Event Driven 8.7% 5.9% 4.7% -1.5% 13.4% 18.7% 2.7% 6.9% 2.7% 2.8% 9.3% 10.3% 4.2% 4.9% -23.3% -22.1% 13.4% 16.6% 5.2% 2.0% -8.9% -4.9% 3.5% 6.0%

EFG Asset Management

EFGAM RESEARCH & PUBLICATIONS Knocking on Asia’s door Perspectives on risk & oppor Risks and Opportunities in

tunity Issue 1

Strategic Insight

Visit www.efgam.com to access our latest investment communications:

Issue 20 – 4 December 2012

European High Yield

QUA RTER LY REV IEW

by Moz Afzal

2

Figure Debt As % of arily good EUR-denominated Spain 2012 has been an extraordin most high Total EU HY year for fixed income, with indices yield and emerging market returns. It is digit registering good double for the year to interesting to note that higher exhibited has Spain date, high yield than US 37% returns with lower volatility EU HY Treasuries.

63% going into However, the wall of money to be fixed income looks to us have jumped in indiscriminate – allocators the ding without necessarily understany in Europe’s Source: BOAML fundamentals, and particularl issues. A case case, some of the technical 3). At the dislocation of US high yield market (Figure would in point is the potential one the event of a European high yield level, European high yield in that is five in our view is therefore assume an impact Spanish downgrade, which yield high times bigger. a real possibility. The European at around Spanish level market currently stands yield At the global high did get a represent an Eur200bn (Figure 1). If Spain so will go downgraded bonds will or by around 8%. downgrade, some Eur75bn expansion in the universe to high yield, impact will be from investment grade Still significant, but the of all European (Figure 4), which will mean that 37% like that of GM and Ford more Spanish from rise in high high yield will come where we saw a short sharp stability. companies (Figure 2). yield spreads and then Figure 1

Debt EUR-denominated Spanish Debt EUR-denominated EU HY Debt USD-denominated Spanish Debt USD-denominated US HY Spanish Debt Total Global HY Total

€ 75 bn € 202 bn $20 bn $1,001 bn $112 bn $1,385 bn

Source: BOAML

big deal? Well, Why is this event such a to sell their fund managers will have yield bonds to existing European high ed Spanish make room for the downgrad cause bonds and this switch will time we saw last the fact, In . disruption downgrade of something similar was the junk which forced Ford and GM in 2005 to to widen market yield high US the whole At the time in spread terms by 40bps. d 7% of the Ford and GM only represente

This issue:

e Central banks: A chang of approach ment US: Post-crisis adjust exit risk?

Europe: An end to Asia: Megacities and middle classes

• I nvest: Investment Solutions Monthly

Winter 2013

Special focus: Bond market seesaw

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Figure 3 d in 2005 GM and Ford Downgrade EFG Asset Management GM: $43bn (May 2005) Ford: $41bn (Sept 2005) time) (both ~7% of US HY at the

•Q uarterly Market Review

Source: BOAML

t it maybe wise From a trading stand-poin European to sell existing high yield are currently names, especially as spreads for higher tight, and given the potential on economic defaults in Europe based are Spanish Conversely ces. circumstan 5 shows the bonds worth a buy? Figure before and impact of fallen angel bonds strategy should be after a downgrade. The as spreads to buy on a downgrade, high yield. tighten once they enter

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11 / 2012

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