Convergence in the funds industry, from mutual funds to private equity

6th Annual PortfolioConstruction ConferenceConvergence in the funds industry, from mutual funds to private equity

Patrick TuohyAsia Pacific Head

HSBC Alternative Investment GroupAugust 2007

Convergence in the funds industry, from mutual funds to private equity

““It is not It is not necessary tonecessary to change. Survival is not mandatory.change. Survival is not mandatory.””W. Edwards Deming(1900-1993)

““The more things change, the more they are the same.The more things change, the more they are the same.””Alphonse Karr (1808-1890)

3

Convergence in the funds industry, from mutual funds to private equity4

1

2

3

4

5

6

7

8

The Past – Investors drive product innovation 4

The Present – Absolute return is the measurement of choice 8

The Future – Where are we headed ? 15

Contents

1. The Past

Convergence in the funds industry, from mutual funds to private equity6

1 Growth in mutual fund

Mutual Fund Growth

$2,811

$3,526

$4,468

$5,525

$6,846 $6,965 $6,975$6,390

$7,414$8,107

$8,905

$10,414

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

AUM

(US

D b

n)

0

2000

4000

6000

8000

10000

12000

Num

bers of fund companies

Assets Under Management (USD bn)

Numbers of fund companies

Source: “2007 Investment Company Fact Book” by ICI

Convergence in the funds industry, from mutual funds to private equity

1

7

Growth in index funds

342 index funds managed total assets of USD749bn, as of year-end 2006.

Index Funds Growth

$28,691$33,299$58,377

$99,622

$172,971

$268,728

$392,402$388,878$374,982$331,296

$460,849

$560,146

$625,046

$748,823

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

AUM

(USD

MM

)

0

50

100

150

200

250

300

350

400

Numbers of Index Funds

Net Assets of Index Funds (USD MM)

Number of Index Funds

Source: “2007 Investment Company Fact Book” by ICI

Convergence in the funds industry, from mutual funds to private equity

1

8

Growth in hedge funds

Hedge Fund Growth & Number of Hedge Funds (incl FoHFs) (1990 - Q1 2007)

$39 $58$96

$168 $167 $186$257

$368 $375$456 $491

$539$626

$820

$973

$1,105

$1,465

$1,568

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q12007Years

Ass

ets

(USD

bn)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Numbers of hedge funds

Assets Under Management (USD bn)

Number of hedge funds

Source: Q1 2007 HFR Industry Report

2. The Present

Convergence in the funds industry, from mutual funds to private equity10

2 Absolute return is the benchmark of choice

Hedge fund investors 2006

Convergence in the funds industry, from mutual funds to private equity

2 Private Equity the king of the jungle

Vintage Funds Yielded Returns

13.1% 14.7% 12.1%

22.1%16.0%

25.4% 21.4% 22.4%

12.0% 12.8% 9.0%5.2%

11.3% 13.0% 16.7%

27.2% 25.3% 26.4%18.4%

17.7% 18.0%14.5%

28.6%

20.0%

41.0%

25.8%33.2%

19.8% 18.6%

13.1%10.9%

16.3%17.4%

23.0%

42.2%36.8%

27.2%

25.2%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Vintage Year

Inte

rnal

Rat

e of

Ret

urn

as o

f 31

Mar

ch 2

007

Top Quart ile US PE Funds (Dollar Weight ed Net Ret urn t o LPs Based on Vint age Year)

All US PE Funds (Equal Weight ed, Dollar Weight ed Net Ret urn t o LPs Based on Vint age Year)

S&P/ ASX 200 Index

S&P 500 Index

Source: Cambridge Associates LLC U.S. Private Equity Index and Benchmark Statistics, 31 March 2007; BloombergNote1: 2005 and 2006 returns are not material as results are premature and capital continues to be deployedNote2: Based on data compiled from 630 U.S. private equity funds, including fully liquidated partnerships. Returns are net of fees, expenses and carried interest.

Convergence in the funds industry, from mutual funds to private equity

2

Hedge fund universe

Liquid Alpha focused

Index fundsETFs

Event drivenDeep valueActivist

Alpha returns vs. Liquidity

Convergence in the funds industry, from mutual funds to private equity

2 Investible indices

Source: CS/Tremont Index

CS/Tremont Investible vs. Non-investible Indices (Jun 2002 - Jun 2007)

50

100

150

200

May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07

Credit Suisse/Tremont Hedge Fund Index (Non-investible)

Credit Suisse/Tremont Investable Index

Convergence in the funds industry, from mutual funds to private equity

Hedge fund universe

Liquid Alpha focused

Index fundsETFs

Event drivenDeep valueActivist

DiversifiedLow fees

ConcentratedHigh feesLess liquid

2 Alpha returns vs. Liquidity

Convergence in the funds industry, from mutual funds to private equity15

2 130/30 Funds the investment industry intersection

3. The Future

Convergence in the funds industry, from mutual funds to private equity17

3 The future

High High LiquidityLiquidity

LowLowLiquidityLiquidity

Expected Expected AlphaAlpha

ETFs / Indexed equity

Long-only Funds

Indexed FoFs

130/30 Funds

Specialist Event Driven Hedge Funds

Private Equity

High High LiquidityLiquidity

LowLowLiquidityLiquidity

Expected Expected AlphaAlpha

ETFs / Indexed equity

Long-only Funds

Indexed FoFs

130/30 Funds

Specialist Event Driven Hedge Funds

Private Equity

Convergence in the funds industry, from mutual funds to private equity

Alternative Investment Group

(AIG)(USD 45.7bn)*

EuropeLondonGenevaZurich

AsiaHong KongSingapore

Tokyo

3 HSBC Alternative Investment Group (“AIG”)

AmericaNew YorkAustraliaAustralia

*As of 30 June 2007

Convergence in the funds industry, from mutual funds to private equity19

This document has been issued by HSBC Alternative Investments Limited on behalf of the Alternative Investment Group (“AIG”) for information purposes only. AIG and HSBC Alternative Investments Limited are part of the HSBC Group, providing hedge fund advisory services to institutional and private investors.. The contents of this document are not and should not be construed as an offer to sell any investment, instrument or service. Furthermore, this document does not constitute the solicitation of an offer to purchase or subscribe for any investment, instrument or service in any jurisdiction where, or from any person in respect of whom, such a solicitation of an offer is unlawful.

This document is intended for Professional Investors only.

© Copyright. HSBC Alternative Investments Limited 2006, whose office is at 78 St. James’s Street, London, SW1A 1JB. ALL RIGHTS RESERVEDNo part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC Alternative Investments Limited.