HEDGE FUNDS — THE DYNAMIC HEDGE FUND LANDSCAPE Since their inception as an asset class, hedge funds in the aggregate have outperformed virtually every benchmark index and delivered rich rewards to investors. While initially there were very few private funds accessible only to ultra high net worth individuals and family offices, during the 1990's some superstars emerged across a range of strategies, whose influence helped spawn more funds and drive industry growth, particularly among institutional investors, during the early part of this decade. At its recent peak in early 2008, the hedge fund industry had $1.8 trillion in assets under management globally. 2008/2009 — AN UNPRECEDENTED TIME Although hedge funds still outperformed many investments with similar risk profiles in 2008, by year end, the industry had shrunk to $1.4 trillion. The downturn in the global economy, credit tightening and market meltdowns created a perfect storm forcing many hedge funds into distress or out of business completely. In fact, nearly 15% of all U.S. based hedge funds liquidated in 2008. To add insult to injury, in the wake of overall economic malaise, the housing crisis and obvious fraud exposures, the media has been relentless in maligning the hedge fund industry. This irrational focus has fomented public outrage, and prompted legislative retaliation in the form of burdensome regulation and increased oversight and scrutiny, making it more and more difficult to operate profitably. In addition, investors are requiring ever more liquidity, transparency and flexibility, further constraining managers and increasing the costs of running their businesses. How do Hedge Funds address this situation and what are they looking toward in 2009? Looking forward, hedge funds will continue to play a central role in institutional, UHNW and family office investment strategies and will remain an integral and highly relevant segment of the alternative investment landscape. The hedge fund universe of the future will be populated by fewer firms, those who are efficient, robust and scalable, deliver value and diversification opportunity to investors, and are able to effectively execute on their investment ideas. Amidst all of today's uncertainty, one thing is abundantly clear; the hedge fund industry will consolidate to meet and rise above the challenges to build strong, profitable firms. CAPITAL RAISING & ALPHA — THE HOLY GRAIL As 2009 progresses, capital raising and alpha generation are top priorities for asset managers. As trends indicate, these dual objectives are likely best met through consolidation and increased efficiency. Larger firms are at a competitive advantage in terms of human capital and recognized talent, enabling them to source and attract new investment. These larger firms, seeking to be as efficient and profitable as possible are focusing on increasing AUM through client acquisition complemented by a broader, more diverse offering to existing clients. Additionally, many of these firms have a comprehensive (expensive) platform that is underutilized and could be leveraged by the addition of investment teams that bring AUM and fees and are cash flow accretive. On the flip side, there are many smaller firms struggling in their capital raising efforts due to their size, lack of institutional quality marketing staff or less than adequate platform. In light of recent changes in the regulatory environment as well as investor demand for greater transparency, a solid infrastructure and platform have become de riguer. This opportunity to leverage an existing infrastructure or gain access to one is a driving force in the trend toward consolidation. Beyond these considerations, hedge fund consolidation makes sense on many levels, especially now. CONSOLIDATION — A STRATEGIC OPPORTUNITY For Larger Firms Seeking to Acquire The "build or buy" question has been answered. Among the key benefits for larger firms is the opportunity to hire managers and investment teams with proven capabilities in order to broaden their product offering, gain intellectual capital within and across strategies and build a more efficient organization. With strong cash positions and access to capital, successful funds are showing a strong interest in building out portions of their business where they lack in-house expertise. Given the current valuation levels, firms can more rapidly and cost-effectively grow through acquisitions than by more gradually building a new team. For Smaller Firms Seeking to be Acquired Acquisition (integration, really) has become a very attractive option for smaller firms doing business in the current legislative and economic environment. Additional compliance, tax and transparency requirements are increasing the complexity, cost and risk of running a hedge fund. Access to institutional investors, especially pension funds, will become ever more restricted to the larger platforms offering managed accounts, liquidity provisions, transparency, and strong investor relations and risk management teams. Shared infrastructure and complementary skills increase profitability and sustainability of the merged entities, and selling an equity stake is generally a more investor friendly option than liquidating or putting up gates. In such trades, managers can retain a significant portion of strategic control and economics in the incremental revenues they bring . ALPHA SEARCH — THE RIGHT PARTNER IN CONSOLIDATION Alpha Search is solely focused on the business of hedge funds and funds of funds. With over 26 years of human capital expertise and a leadership position in alternative investment business development, Alpha Search brings its unique perspective, tremendous network and team of dedicated professionals to each transaction. Our mission is to bring together the right firms to mutually leverage talented investment teams, scalable infrastructures and critical client relationships, creating firms well positioned for sustainable growth. Our human capital centric approach is our strategic advantage; on each transaction we guide clients through the complex human dynamics, cultural aspects and incentive alignment that are critical to long-term consolidation success.