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Alternative Investments

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In delivering the UBS Client Experience, our Financial Advisors take the time to understand your needs and goals and proactively provideappropriate solutions. We keep you informed on a periodic basis, and can monitor and update strategies, as appropriate, to respond to ever-changing markets and your evolving needs.

Talk to Your Financial AdvisorYour Financial Advisor can provide you with more information aboutalternative investments and help you evaluate the choices available from the perspective of your overall investment goals, risk tolerance and time horizon.

800-486-2608 www.ubs.com

The UBS Client Experience

Table of Contents

What Investors Should Know . . . . . . . . . . . . . . . . . . . . 2

Alternative Investments . . . . . . . . . . . . . . . . . . . . . . . . . 3

Hedge Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Hedge Funds-of-Funds . . . . . . . . . . . . . . . . . . . . . . . . 11

Managed Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Glossary of Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2

Please note that alternative investments are not for everyone. The solepurpose of this document is to educate investors and others by providinginformation about this asset class. This document does not constitute anoffer to purchase any securities or to obtain any investment advisory services.

The risks associated with alternative investments derive from various factors,depending on the specific type of investment. They include a high degree ofilliquidity and limited transparency.

In addition, some alternative investments:

• Make frequent use of leverage and other speculative or aggressiveinvestment strategies

• Are affected by fluctuations in interest rates, currency values or credit quality

• Are not required to provide periodic pricing or valuation information to investors

• May involve complex tax structures and delays in distributing important tax information

• May charge high fees

Before investing, be sure to review the detailed explanation of risks, togetherwith other information in the relevant offering materials. These include—but are not limited to—information regarding the tax treatment of theinvestment. Keep in mind that neither UBS Financial Services Inc. nor any ofits employees provide tax or legal advice. Please consult your tax and legaladvisors regarding your specific situation.

What Investors Should Know

Alternative investments are not appropriate for all investors and carryspecific risks above and beyond those associated with traditional asset classes.

Diversification has long been a key tenet of successful investing. By spreadingtheir holdings—and risk—across multiple asset classes, investors may seek to reduce market volatility while potentially generating returns on target withtheir goals.

In recent years, diversification-minded investors have increasingly addedalternative investments to their traditional portfolios. Because alternativeinvestments do not generally move in tandem with the equity and fixedincome markets, they provide unique risk and return properties generally notassociated with traditional investments. Thus, their prudent use may helpqualified investors capture upside potential while minimizing downside risk.

Alternative Investments at UBSAt UBS, we follow a disciplined wealth management approach that beginswith an understanding of your objectives and preferences. We work closelywith you to consider alternative investments as part of a diversified assetallocation for your portfolio, paying particular attention to high qualitymanager selection and stringent risk management.

UBS is recognized as a global leader in alternative investments, managing anddistributing more than $70 billion in this category. Our investment professionalsin North America, Europe and Asia have relationships with many of theworld’s leading alternative asset managers. As a result, we can bring this elite talent to qualified investors who seek attractive risk-adjusted returns.

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Alternative Investments

By combining alternative strategies with traditional assets,investors have an opportunity to create more efficientportfolios, targeting steady gains and wealth preservationthrough up and down markets alike.

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What Are Alternative Investments?Alternative investments cover a broad range of strategies and structures that fall outside theboundaries of traditional asset categories. They include hedge funds, managed futures,private equity and real estate.

Most traditional investment managers aim to outperform a market benchmark, such as theS&P 500 or the Russell 2000® indices. Alternative investment managers, in contrast, seekabsolute returns, which is a positive gain independent of the overall market. Alternativeinvestment managers typically pursue different objectives and have a broader array of toolsat their disposal than traditional asset managers. This may allow for greater flexibility in their operations.

The Role of Alternative InvestmentsMany investors express their investment objectives in absolute return goals with a specificneed in mind—for example, for financing their retirement, their children’s education or thepurchase of a vacation home, or for income generation, wealth preservation or wealthtransfer. By combining alternative strategies with traditional assets, individual investors havean opportunity to create more efficient portfolios.

An appropriate allocation to alternative investments, and the amount that is invested in eachalternative strategy, should be determined by considering numerous factors, including theinvestor’s risk/reward profile, absolute return objectives, investment goals, liquidityrequirements and investment time horizon.

Key Differences among Manager Types

Traditional managers Alternative investment managers

Focus Relative performance Absolute performance

Deployment of capital Typically fully invested Opportunistic

Main success factor Market direction Manager skill

Correlation with equity Typically high Reduced—and typically lowand bond markets

Chief driver of manager Assets under management Fund profitscompensation

How risk is defined The possibility of The possibility of a negative returnunderperforming a benchmark

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The Role of Alternative Investments in Asset AllocationThis pie chart shows how alternative investments might figure in a typical portfolio.*

Annual ReturnsAlternative investment strategies encompass a variety of risk levels and represent diversesegments of the capital markets. Since investment styles perform differently at a given point in a market cycle, a well-diversified portfolio should have exposure to a number of investmentclasses, thus lessening the impact of any one asset class on overall portfolio performance.

Cash

Fixed Income

InternationalEquities

U.S. Equities

Alternative Investments• Hedge Funds• Hedge Funds-of-Funds• Managed Futures• Private Equity• Real Estate

* For illustrative purposes only.

The Value of DiversificationThe chart below illustrates the importance of diversification. Asset classes and investment stylesmove in and out of favor from year to year. Since no one can predict returns, diversification acrossasset classes is the best way to consistently gain exposure to the markets’ potential, as well asminimize risk. Please refer to the Glossary of Indices at the end of this guide for a description ofthe various indexes.

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Hedge Funds

International Stocks

Large-Cap Growth

Large-Cap Stocks

Large-Cap Value

Small-Cap Growth

Small-Cap Stocks

Small-Cap Value

U.S. Bonds

-4.7%

-20.5%

-22.1%

-17.5%

10.3%

-30.3%

-11.4%

-23.6%

-20.9%

-6.9%

0.2%

-21.8%

-17.4%

9.0%

-24.7%

-3.1%

-19.5%

14.4%

40.2%

21.3% 28.0%

2.6%

31.0% 21.8%

23.4%

16.0%

44.2%

9.1%

0.4%

46.0%

18.4%

18.9%

-1.8%

28.5% 16.5% 22.4%

-2.6%

21.3% -3.0%

2.5%

30.4% 7.6%

10.1%

1.3%

37.5% 23.0% 33.4% 28.6%

21.0% -9.1%

-11.9%

10.2% -13.9%

30.5% 6.2%

9.4%

4.4%

0.2%

18.2%

25.3%

-15.2%

-22.6%

16.0%

7.4%

9.8%

-2.9%

18.5%

3.6%

9.7%

8.7%

-0.8%

11.6% 8.4%

51.2%

7.8%

13.4%

-2.4%

31.0%

11.3% 13.0% 1.2%

43.1%

-22.4%

-9.2%

41.7%

29.1%

23.8%

-1.5%

25.8%

21.4%

31.8%

-6.5% -1.5%

22.8% 14.0%

38.4%

5.1%

1.7%

3.1%

38.1% 24.0% 36.5% 42.2%

28.3%

-22.1% -12.7%

22.6%

10.5%

18.6% -0.6%

37.0% 22.0%

30.0%

14.7%

12.7%

6.1%

-11.7%

1990 200120001991 1992 1993 1994 1995 1996 1997 1998 1999 2002 2003

47.3%

31.8%

25.7%

35.3%

48.5%

4.1%

46.0%

20.5%

28.7%

2004 2005

18.4%

17.6%

13.8%

7.7%

13.3%

4.7%

20.1%

10.9%

4.3%

10.7%

2.4%

4.9%

4.6%

3.5%

3.6%

10.9%

2.8%

2.5%

13.9%

-0.6%

13.5%

8.8%

5.3%

6.7%

14.2%

4.2%

2.3%

2006(1/1-3/31)

Source: Lipper; HFRI (2005), www.hedgefundresearch.com. Indices are unmanaged and are not available for directinvestment. Past performance is no guarantee of future results. Hedge funds are represented by the HFRI, an equallyweighted performance summary of equity long/short hedge funds from a universe of over 450 hedge funds worldwide. Noindex is directly comparable to a particular hedge fund’s investment strategy.

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Hedge Funds

Accessing strategies for improved risk-return potential

A hedge fund is a private pool of assets that may invest in a diverse array of instruments, common stocks and bonds, but may also include futures,options, swaps and other complex derivatives. Hedge funds are generallymanaged with a view to minimizing losses during turbulent markets whileseeking superior risk-adjusted returns.

Hedge funds today are increasingly viewed as an important component of a diversified portfolio strategy for qualified investors. Indeed, hedge fundsoften make use of strategies, such as distressed debt and merger arbitrage,that individual investors cannot readily access.

The hedge fund universe has expanded dynamically over the past decade.Since the mid-1990s, the number of funds has increased from fewer than1,000 to more than 8,000; total assets have grown from less than $200billion to more than $1 trillion; and the range of available strategies andstyles has proliferated.1 This has made finding appropriate solutions morechallenging. Investors are increasingly turning to financial advisors to helpthem make the appropriate selections.

There are risks specifically associated with investing in hedge funds. There canbe no assurances that a hedge fund’s investment objective will be achieved orthat its investment program will be successful. The risks typically includethose associated with investing in short sales, options, small-cap stocks, “junkbonds,” derivative instruments, distressed securities, non-U.S. securities andilliquid investments.

1 Wall Street Journal, March 15, 2006.

For additional information about hedge funds, visit the Securities and ExchangeCommission’s website at http://www.sec.gov/answers/hedge.htm

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Strategies Hedge funds are managed across a broad continuum of objectives, styles and strategies. The approaches employed by the managers range from stock selection to distressed debt to complex macroeconomic analysis. Security selection includes relatively liquid instrumentssuch as stocks, bonds, options and futures, as well as less liquid ones like direct loans orprivate placements.

Some hedge funds may have strong correlation to the stock and bond markets and,consequently, target returns relative to a particular index or sector. Others attempt togenerate gains that are independent from the direction of the markets and pursue an absolutereturn. By combining skillful security selection and exposure management to reduce lossesduring turbulent markets, hedge funds strive to produce superior risk-adjusted returns.

Hedge Fund StrategiesHedge fund managers typically have greater investment flexibility than traditional managers. While some focus on a single strategy, others may allocate opportunistically across many of thestrategies noted below.

Equity Long/ShortInvests in a core holding oflong equities and sells shortstocks and/or stock optionsand index options in aneffort to reduce marketexposure and risk.

Global MacroAttempts to profit fromanticipated price movementsin stock markets, interestrates, foreign exchange andphysical commodities.

Distressed SecuritiesInvests in or sells shortsecurities of companiesundergoing or expected toundergo a significant changesuch as bankruptcy,reorganization, orrecapitalization.

Merger ArbitrageInvests long and short inevent-driven situations suchas leveraged buyouts,mergers and hostiletakeovers.

Equity Market NeutralInvests in long equitypositions and anapproximately equal dollaramount of offsetting shortpositions in an attempt to achieve a net marketexposure as close to zero as possible.

Convertible ArbitrageBuilds a portfolio ofconvertible securities, andhedges company risk byshorting equities, debtsecurities, or usingderivatives.

Statistical ArbitrageUtilizes quantitative analysisof technical factors to seekto capitalize on pricinginefficiencies between relatedequity securities.

Fixed Income ArbitrageSeeks to profit by investing inthe pricing inefficiencies thatoccur among related fixedincome securities.

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A Range of Styles The ability to classify and compare funds has become more robust as the industry has developed.The following table illustrates how strategies and their market sensitivity are typically grouped.

Relative Value/Arbitrage Event-Driven Directional/Trading

Fixed Income Arbitrage Merger Arbitrage Equity Long/Short

Equity Market Neutral Distressed Macro

Statistical Arbitrage Special Situations Managed Futures

Convertible Arbitrage

Lower HigherMarket Exposure

For illustrative purposes only.

Alignment of Interests Hedge fund managers typically earn a percentage of fund profits and have a significant portionof their personal assets invested in their strategies. As a result, their financial involvement helpsensure the alignment of manager and investor interests.

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Historical Performance of Hedge Fund StrategiesThe table below shows the historical performance and standard deviation of various hedge fund strategies from 1990to 2005. Keep in mind that just as markets fluctuate, individual hedge fund strategies move in and out of favor, andreturn and volatility characteristics change over time. Indices are unmanaged and are not available for direct investment.Past performance is no guarantee of future results.

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Source: Hedge Fund Research, Inc., ©HFR, Inc., www.hedgefundresearch.com, (January 2006). Please see Glossary of Indices and Glossary of Terms beginning on page 22 for more information.

Annualized Returns Risk Metrics Correlation Analysis

(Jan. 1990–Dec. 2005)

Jan. 1990- Standard Maximum S&P LehmanHFRI Indices 1 yr 3 yr 5 yr Dec. 2005 Deviation Drawdown 500 Aggregate

Convertible Arbitrage -1.57% 3.06% 6.24% 9.99% 3.53% -7.30% 0.28 0.20

Distressed 8.95 18.84 14.89 15.16 5.98 -12.80 0.39 0.04

Equity Market Neutral 6.39 4.32 4.11 9.16 3.11 -2.70 0.13 0.22

Event-Driven 7.57 15.75 10.73 14.53 6.51 -10.80 0.64 0.08

Hedge Fund-of-Funds 7.43 8.62 5.88 9.89 5.53 -13.10 0.44 0.10

Equity Hedge 10.66 12.83 6.56 17.16 8.76 -10.30 0.66 0.08

Macro 6.05 10.46 9.12 15.62 8.23 -10.70 0.38 0.35

Merger Arbitrage 5.37 5.64 3.73 10.08 4.23 -6.50 0.47 0.11

Fixed Income Arbitrage 5.54 6.95 6.88 8.27 4.20 -14.40 -0.05 -0.15

Broad Market Indices

S&P 500 4.93 14.39 0.54 10.54 14.27 -44.70 1.00 0.15

Lehman Aggregate 2.43 3.62 5.88 7.36 3.87 -5.20 0.15 1.0

Choosing a single hedge fund can be a daunting process. There arethousands of choices with different strategies, objectives and risk profiles.Fund transparency is often limited, and investment minimums are typicallyhigh. For these reasons and others, many qualified investors turn to a hedge fund-of-funds.

What Is a Hedge Fund-of-Funds?A hedge fund-of-funds is a hedge fund that invests in other hedge funds. A well-established fund of hedge funds offers numerous potential benefits:

• Broad diversification across asset classes and blended levels of risk and return

• Access to hedge funds that would otherwise be closed to new investors• Typically lower minimum investments than single-manager hedge funds• The potential for mitigating the risks of investing with a single fund

The goal of a hedge fund-of-funds portfolio manager is to identify theappropriate mix of investment strategies and hedge fund managers, allocatecapital among them and diligently monitor the underlying funds. Investorsthus receive the benefits of a professionally researched, commingledinvestment without committing substantial resources to manager selection,portfolio construction, ongoing risk management and rebalancing.

There are risks specifically associated with investing in hedge funds-of-funds.They often charge high fees; investors will bear the management fees andother fees and expenses of both the hedge fund-of-funds and its underlyinghedge funds.

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Hedge Funds-of-Funds

A dynamically managed portfolio of hedge funds

For additional information about hedge funds, visit the Securities and ExchangeCommission’s website at http://www.sec.gov/answers/hedge.htm

Hedge Fund-of-Funds StructureHedge Fund-of-Funds

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Creating a Hedge Fund-of-Funds: Selection CriteriaA hedge fund-of-funds provides investors with a dynamically managed portfolio of hedgefunds, in an attempt to lessen the risk of investing in a single vehicle. To that end, themanager considers both quantitative and qualitative criteria when evaluating individualmanagers for inclusion in a fund-of-funds.

Quantitative factors• Manager return performance• Portfolio risk metrics

Qualitative factors• Sustainable and repeatable investment process• Appropriate reporting and compliance procedures and suitable back-office technology• Clean regulatory record• Investment experience in various markets• Alignment of investor interest through significant manager co-investment

The hedge fund-of-funds manager may add or remove funds and adjust allocations in response to an ongoing assessment of several variables including, but not limited to, manager performance and risk measures, capacity and the market environment.

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For illustrative purposes only. Hedge funds typically hold a larger number of securities, albeit at the manager’s discretion.

Making Up Is Hard to Do

The Compounding EffectThe compounding effect—the cumulative impact of consistent, positive returns—is a powerful force. One year of significant losses requires many years of positive returns just to get back toprior asset values. The following chart illustrates how recovering from a significant loss can be adifficult and lengthy process, even if a portfolio grows at a 10% annual rate of return.

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The Value of $1The graph compares the value of a dollar invested in a diversified funds-of-funds index to a dollarinvested in the major stock and bond indices, between 1990 and 2005.

Source: HFRI, www.hedgefundresearch.com; Lehman Brothers; Standard and Poor’s, January 2006.For illustrative purposes only. Indices are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

$4.52

$3.12

$5.16

0.00

1.00

2.00

3.00

4.00

5.00

$6.00

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05

HFRI FOF Index

Lehman Agg Bond

S&P 500

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20% 25.0% 2 years, 4 months

30 42.9 3 years, 9 months

40 66.7 5 years, 5 months

50 100.0 7 years, 3 months

Managed futures are another category of alternative investments that has the potential to provide diversification and reduce risk when added to atraditional stock and bond portfolio.

A managed futures program is an investment in a skill-based strategy usingfutures and forward contracts. Futures are contracts to deliver specifiedcommodities or financial instruments at a future time; forward contracts areagreements to purchase or deliver commodities at a future time at apredetermined price.

Futures and forward contracts have a market value that fluctuates based onthe shifting value of an underlying asset, such as currencies, stock indices orinterest rates. Asset managers who trade futures and forward contracts in a managed futures program are known as commodity trading advisors (CTAs).

Beyond AgricultureIn the past, agricultural contracts accounted for the bulk of underlying assetsin the managed futures industry. The category has evolved, however, and isnow much more diverse and robust. Fund managers today invest in a broadrange of instruments, including currencies, interest rates, stock indices,energy and metals. Financial futures—currencies, interest rates and stockindices—currently represent the greatest amount of trading volume.

While managed futures funds have been in existence for more than 30 years,investor participation has grown dramatically over the last decade. Assetshave increased from approximately $25 billion in 1994 to more than $132billion in 2005.1

There are risks specifically associated with investing in managed futuresfunds. They include, without limitation, the risk of total loss; a limited abilityto redeem from such funds (e.g., there may be no secondary market for the interests of the fund); and a fund’s fees and expenses may offset anyprofits or gains.

Managed Futures

Seeking to transform market volatility into profits

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1 Source: Barclay Group, January 2006.

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The Case for Managed FuturesThe potential benefits of adding managed futures to a diversified portfolio include:

• Enhanced overall portfolio returns with reduced risk: This is possible because of managedfutures’ historically low-to-negative correlation with the equities and fixed income markets.

• The ability to profit from diverse investment environments: CTAs can purchase or sellshort futures in anticipation of rising or falling markets, and can allocate to hard commoditiesduring times of rising inflation.

• Global diversification: Managed futures funds can participate in more than 80 marketsaround the world.

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The Advantage of Low CorrelationDuring times of extreme stress in the equity markets, the low or negative correlation that managed futures may provide has proved to be extremely useful.

Source: Barclay Group; Standard & Poor’s, January 2006. For illustrative purposes only. Indices are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

Event Federal Reserve Russian credit Tech bubble September 11th Pre-Iraqrate hike default collapse war selloff

Time Period 2/94–6/94 8/1998 4/00–11/00 9/2001 12/02–3/03

-15%

-10%

-5%

0%

5%

10%

Barclay CTA Index S&P 500 Index

Types of Futures Investors There are two types of participants in the futures market: hedgers and speculators.

• Hedgers seek protection against adverse price fluctuations. Financial institutions andcommercial producers or consumers often hedge. For example, an apparel company thatpurchases large quantities of cotton may use futures to limit its risk exposure to volatile cotton prices.

• Speculators (investors) analyze and forecast price movements with the objective of making a profit. Speculators may include CTAs, proprietary traders and individual investors.

16

Types of Futures TradersIn general, CTAs and other futures traders tend to follow two main strategies: technical and fundamental.

• Technical Traders—The majority of those who use technical strategies are known assystematic trend followers. These managers rely on sophisticated quantitative models toidentify price trends in the major futures markets. Once a trend (positive or negative) isidentified, the manager will hold long or short positions until the models signal a change.Rising and falling markets are favorable for trend followers, while sideways markets are less favorable.

• Fundamental Traders—Managers who use fundamental analysis focus more on economicconditions—supply and demand—and other relevant industry factors to derive price forecastsfor various futures contracts. These managers then position their portfolios based on the price forecasts and may change their fundamental views as more data become available.Performance for this group is based on the accuracy of their forecasts and their ability tomake changes when current price trends conflict with their fundamental forecasts.

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Managed Futures For illustrative purposes only. Stages are random and do not necessarily happen in this order.

Stages 1 and 4Good environment for systematic trend followers.

Stages 2 and 3More difficult for systematic trend followers.

80

100

120

140

160

180

Stage 1Directional Price Movement(Rising)

Stage 4Directional Price Movement(Falling)

Stage 2Sharp Price Reversal

Stage 3Sideways RangeMovement

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Private equity funds are pools of actively managed capital that invest primarilyin private—but also public—companies, with the intent of improvingoperations and adding value. Private equity managers seek to create value inthe companies by improving operations, reducing costs, selling non-coreassets and maximizing cash flow.

Private Equity CharacteristicsA private equity manager’s investment approach differs from that of a traditional asset manager in several key respects:

• While performing due diligence on a company, the private equity managermay gain access to information that is less transparent and more availableto those with industry-specific knowledge and resources.

• The manager will actively work with management on the direction andstrategy of the company, or bring in new management, if necessary.

• The manager will often sit on—or control—the company’s board. • There is an alignment of financial interests among the private equity fund

manager, the company management and the fund investors, due to co-investment among the parties.

There are risks specifically associated with investing in private equity. Capitalcalls will be made on short notice and the failure to meet capital calls canresult in significant adverse consequences, including but not limited to a totalloss of investment.

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Private Equity

Managers taking an active role to create value

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Raising Capital, Distributing ProceedsPrivate equity managers typically raise capital commitments from their investors in the form of a limited partnership. Once the partnership has reached its target size, it is closed to furtherinvestment. The manager then has a fixed capital pool from which to make opportunisticinvestments, typically over the next three to six years.

Much of the investment gains are realized and distributed to clients in the latter part of a fund’s life, as portfolio holdings are sold. Because a private equity manager typically holds a company for several years, the investor’s gains are often characterized as long-term.

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Taking an Active RoleWhether they specialize in young or mature companies, private equity managers generally take anactive role in their management.

Types of Private Equity

Venture Capital Focused on buildingbusinesses, by investing innewly developing orunderdeveloped products orcompanies, usually at an earlystage in a company’s life cycle.

MezzanineLater-stage venture capital,often the final round offinancing prior to an initialpublic offering (IPO).Mezzanine debt may includeequity participation.

Growth Capital Providing equity or debtfinancing to a company for ananticipated period ofsignificant growth orexpansion.

Buyout Typically purchases asignificant portion or majority control of mature,well-established companies.A leveraged buyout isaccomplished with borrowedmoney.

Special SituationsInvestments that capitalize ona range of opportunities, suchas distressed debt securities,changing governmentregulations or industry trends.

Source• Identify target company• Conduct due diligence• Explore ways to add value• Purchase/invest at

attractive valuations• Create appropriate

investment structure

Enhance Value• Structure financing• Partner with company

management • Advise on strategic,

operational and financialissues

• Provide access to industry contacts

Exit• Sell to strategic or

financial buyer • Initial public offering• Recapitalization• Sell securities in public

market • Exercise provisions of

structured investment

Manager ParticipationA private equity manager’s compensation is primarily a percentage of the net profitsgenerated by the fund. Unlike most other investments, private equity performance ismeasured by an internal rate of return. This approach differs from a standard annualized rate of return in that it takes cash flows (capital calls and distributions) into consideration.

A Rapidly Growing IndustryThe presence and power of private equity firms has grown dramatically in recent years.Private equity managers today are stewards of more than $500 billion of enterprise valueand employers of millions of workers. This market is likely to remain robust as leveragedbuyout (LBO) firms continue to enter the market, poised to deploy more than $150 billion of client capital. With leverage, LBO firms represent $500 billion to $750 billion ofacquisition capacity.1

Private Equity Returns: The J-CurvePrivate equity returns typically follow a J-curve. After clients have made their capital commitments,the manager draws down the capital as investment opportunities are identified. Private equitymanagers typically enhance the value of the portfolio companies over a period of years until thefund’s holdings are ready to be distributed. Much of the gains are typically realized in the latterpart of the private equity fund’s life.

Years

Inve

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Flow

01 2 4 3 5 6 7 8 9 10

Investment Period

Harvest Period

Capital calls and management fees

Distributions

Cumulative cash flows

For illustrative purposes only. The graph represents a typical capital drawdown and distribution scenario for a10-year fund.

1 Source: Venture Xpert, March 15, 2006.

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In general, real estate investments can be designed to target a number of objectives: reduce overall portfolio risk, achieve solid absolute returns,provide a hedge against inflation and deliver strong cash flows to theinvestor.

Real estate investments can be organized into two broad categories: directownership and indirect investment.

• Direct ownership—Investment in property such as raw land, farmland,timber assets or commercial real estate. Direct real estate holdings are lessliquid than marketable securities, and the valuation of properties is basedon a combination of internal and independent appraisals.

• Indirect investment—Investment in real estate securities, includingmortgage-backed securities and real estate investment trusts (REITs). It isimportant to note that the market value of exchange-traded REITs is notbased directly on the appraisals of the underlying properties. Rather, theirmarket value has historically been based on market sentiment, and attimes is strongly correlated to the broader equity market.

There are risks specifically associated with investing in real estate productsand real estate investment trusts. They involve risks associated with debt,adverse changes in general economic or local market conditions, changes ingovernmental, tax, real estate and zoning laws or regulations, and, for somereal estate products, the risks associated with the ability to qualify forfavorable treatment under the federal tax laws.

20

Real Estate

An array of property types that seek to generate income and growth

21

Asset AllocationPersonal property, such as a principal residence or a vacation home, is generally notconsidered a real estate investment for asset allocation purposes. Ownership of raw land,rental property, or interests in any real estate asset that is held for investment purposesshould be included when discussing asset allocation or implementing a new investmentprogram.

Commercial PropertiesThe main sectors of the commercial market include office buildings, retail stores, apartmentsand industrial sites, as well as specialty properties such as hotels, hospitals and storagefacilities. Rents provide owners with a current income stream, and transactions offer anopportunity for future capital gains to investors.

Real estate investment cycles have typically been longer than other asset classes and areoften heavily influenced by national and regional economic activity. Individual sectors of thereal estate universe often have their own cycles, which may not be closely correlated to theoverall asset class.

Real Estate StrategiesCommercial real estate investments can be divided into four main strategies. Risk and returnparameters generally increase from the Core strategy through the Opportunity strategy.

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Real Estate StrategiesCommercial real estate investments can be divided into four main strategies. Risk and return parametersgenerally increase from the Core strategy through the Opportunity strategy.

Real Estate Core Core Plus Value Added OpportunityStrategies

Leverage None or low Moderate Moderate High

Cycle 7–10 years 4–7 years 5–8 years 2–4 years

Occupancy Near or fully occupied Near or fully occupied; Occupied mid-term Occupancy may be low; at time of long-term leases long-term leases with leases with balanced leases of large tenant(s) investment gradual expirations expirations may be expiring soon

Financial and/ No major issues No major issues Manageable or Major issuesor physical controllable issuescondition of property

Income at time Current income Current income; Income upon Little income; of investment moderate capital stabilization strong investment is made for

appreciation capital appreciation capital appreciation potential potential potential

Source: Alternative Investments (US), UBS Financial Services Inc., January 2006.

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Glossary of Indices

Hedge Funds are represented by theHFRI, an equally weighted index ofglobal equity long/short hedge fundsfrom a universe of over 450 funds.Long/short hedge funds combine corelong holdings of equities with theability to utilize short sales of stock orstock index options. Some managersmaintain a substantial portion ofassets within a hedged structure andcommonly employ leverage. Inaddition to equities, some funds mayhave limited assets invested in othertypes of securities. The universe offunds in the Index is limited. Thenumber of funds included in the Indexas well as the amount of capital havevaried over time. No index is directlycomparable to a particular hedgefund’s investment strategy. Indices areunmanaged and are not available fordirect investment. While the Index isfrequently used for illustrativepurposes, it has limitations (some ofwhich are typical of other widely usedindices). These limitations includesurvivorship bias (the returns of theindices may not be representative ofall hedge funds in the universebecause of the tendency of lower-performing funds to leave the Index);heterogeneity (not all hedge funds arealike or comparable to one another,thus the Index may not accuratelyreflect the performance of a describedstyle); and limited data (many hedgefunds do not report to indices, andthe Index may omit funds, theinclusion of which might significantlyaffect the performance shown).

International Stocks are representedby the Morgan Stanley CapitalInternational Europe, Australasia, FarEast Index (MSCI EAFE). It is designedto measure the performance of thestock markets in the developedeconomies of Europe, Australia andthe Far East.

Large-cap growth and Large-capvalue are represented by the S&P 500Barra/Growth and the S&P 500Barra/Value Indices, which areconstructed by dividing the stocks inthe S&P 500 Index according to price-to-book ratios. The Growth Indexcontains stocks with higher price-to-book ratios. The Value Index containsstocks with lower price-to-book ratios.The Indices are market-capitalization-weighted, and their holdings aremutually exclusive.

Large-cap stocks are represented bythe S&P 500 Index, which is anunmanaged index generally consideredto be representative of the U.S. large-cap stock market. The performancedata for the S&P 500 Index assumesthe reinvestment of all dividends, butdoes not deduct fees or expenses.

Small-cap growth and Small-capvalue are represented by the Russell2000® Growth Index and the Russell2000® Value Index, respectively. TheRussell 2000® Growth Index measuresthe performance of those Russell 2000companies with higher price-to-bookratios and higher forecasted growthvalues. The Russell 2000® Value Indexmeasures the performance of thoseRussell 2000 companies with lowerprice-to-book ratios and lowerforecasted growth values.

Small-cap stocks are represented bythe Russell 2000® Index, a market-value-weighted index of the 2000smallest stocks in the broad-marketRussell 3000® Index.

U.S. Bonds are represented by theLehman Brothers Aggregate BondIndex, which includes government,mortgage-backed, asset-backed andcorporate securities of investmentgrade quality or better, with at leastone year to maturity and having anoutstanding par value of at least $100 million.

The Barclay CTA Index is a leadingindustry benchmark that measures theperformance of commodity tradingadvisors.

The S&P 500 Index is an unmanagedindex generally considered to berepresentative of the U.S. large-capstock market. The performance dataof the S&P 500 Index assumes thereinvestment of all dividends, but doesnot deduct fees or expenses.

The Lehman Brothers AggregateBond Index is comprised ofgovernment, mortgage-backed, asset-backed and corporate securities ofinvestment grade quality or better,with at least one year to maturity andhaving an outstanding par value of atleast $100 million.

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Glossary of Terms

Capital callWhen a private equity fund makes aninvestment in a portfolio company,each investor in the fund is notifiedand must contribute their pro ratashare to the fund.

Capital distributionAs private equity investments are sold,the fund’s manager will makedistributions to the fund’s investors.

CorrelationA statistical measure of the inter-dependence of two or more randomvariables. Fundamentally, the valueindicates how much of a change inone variable corresponds to a changein another. A correlation of 1.0indicates a significant relationshipbetween variables.

Due diligenceThe process of evaluating theinvestment strategy and the principalsmanaging the investment product.The firm’s operations and businessplan are also reviewed to assess anyrisks that may hinder the investmentteam from meeting its objectives.

Hedge FundA commingled pool of assets that mayuse specialized techniques—shortselling, options and leverage—that arenot readily available in traditionalinvestment structures. In addition to a management fee, these funds mayalso charge an incentive fee, or paythe managers a percentage of theprofits. Regulatory limits generallyrestrict investment in hedge funds tohigh net worth investors.

HFRIHedge Fund Research, Inc. is aresearch firm specializing in alternativeinvestment information. The companyproduces the HFRI MonthlyPerformance Indices—an industrystandard benchmark of hedge fundperformance.

Hedge fund-of-fundsA commingled pool of capital that isinvested in a diversified group ofmanagers across complementary ornon-correlated investment strategies.Funds-of-funds generally charge anadditional level of fees.

Incentive allocationThe portion of net capital appreciationthat a manager receives asperformance compensation.

Internal rate of return (IRR)A measure commonly used in privateequity to compare investmentperformance. The calculation takesinto account the timing of all capitalcalls and distributions, and theperiodic valuations of all unrealizedinvestments. It is converted to anannualized percentage based on thenumber of years the investment is held.

J-CurveAs private equity investmentopportunities are identified andfunded, capital commitments aredrawn down. Much of the investmentgains are realized in the latter part ofa fund’s life, as portfolio holdings aresold and capital is distributed. Theshape of this process resembles aslanted capital letter J when plottedon a graph.

Leveraged buyout (LBO)A strategy using borrowed money toacquire a company. Leveraged buyoutsallow investment funds to makeacquisitions without committing largeamounts of cash or equity.

Maximum drawdownA measure that can be used toevaluate risk. Maximum drawdownmeasures the peak-to-trough declinein an investment’s net asset value overa period of negative performance. It is simply the single largestpercentage decline in net asset valuethat has occurred since inception ofan investment. Monthly data is usedto calculate this measure.

Net exposureThe percentage of gross long exposureless the gross short exposure. It is onemeasure of a fund’s exposure to theoverall market.

VolatilityA statistical measure of the tendencyof a market or a security to rise or fallsharply within a set period. Volatility istypically calculated by using annualizedstandard deviation of the price orreturn. A measure of the relativevolatility of a stock to the market is itsbeta. A highly volatile market orsecurity means that prices have hugeswings in very short periods of time.

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It is important that you understand the ways in which we conduct business and the applicable laws and regulationsthat govern us. As a firm providing wealth management services to clients in the U.S., we are registered with theU.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering bothinvestment advisory and brokerage services. Though there are similarities among these services, the investmentadvisory programs and brokerage accounts we offer are separate and distinct, differ in material ways and aregoverned by different laws and separate contracts.

It is important that you carefully read the agreements and disclosures that we provide to you about the products orservices we offer. While we strive to ensure the nature of our services is clear in the materials we publish, if at anytime you seek clarification on the nature of your accounts or the services you receive, please speak with yourFinancial Advisor or call 201-352-9999.

For more information, please visit our website at www.ubs.com/workingwithus

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UBS Financial Services Inc.www.ubs.com/financialservicesinc060717-1348-X269

UBS Financial Services Inc. is a subsidiary of UBS AG.

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