sgam-ai.com SGAM ETF EDHEC Alternative Investment Days 2008 London 9 December 2008

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1 sgam-ai.com SGAM ETF EDHEC Alternative Investment Days 2008 London 9 December 2008

2 ETFs and Structured Funds A new ETF generation Delta One index replication Continuous S.E. trading Transparent As simple to hold and trade as a share Cost effective Trackers Structured Funds Combine several types of assets and instruments to meet an objective or a constraint (capital guarantee, performance, ) Customised risk profiles and payoffs Designed for proprietary distribution channels or bespoke products Structured ETFs Structured Structured funds funds traded traded continuously continuously Just Just as as transparent transparent as as traditional traditional ETFs ETFs Cost Cost effective effective versus versus products products of of comparable comparable risk risk profile profile Open Open to to all all Société Générale Asset Management 2

3 A history of innovations Beyond delta one ETFs st 1st capital capital protected protected ETF ETF 1st 1st ETF ETF with with an an embedded embedded active active management management feature feature 1st 1st structured structured ETF ETF with with leverage leverage 1st 1st ETF ETF with with 200% 200% leverage leverage in in Europe Europe st 1st short short and and leveraged leveraged short short ETF ETF on on NYSE NYSE Euronext Euronext st 1st multi-asset multi-asset class class ETF ETF 1st 1st ETF ETF to to replicate replicate the the Hedge Hedge Fund Fund Performance Performance Société Générale Asset Management 3

4 Innovation SGAM ETF most traded ETF on NYSE Euronext October 2008 SYMBOL NAME DAILY AVERAGE TRADE SIZE MS% BX4 1 SGAM CAC XBEAR CAC 1 LYXOR CAC L40 3 SGAM CAC40 LEVERAGE MSE 4 LYXOR EURO STOXX BXX 5 SGAM ESTXX50 XBEAR EUEA 6 ISHARES EURO STX EUE 7 ISHARES EURO STX DAX 8 LYXOR ETF DAX CSH 9 LYX.ETF EUROCASH MTB 10 LYXOR MTS 3-5Y st and 3rd most traded ETF by trades on NYSE Euronext in 2008 YTD 3rd and 8th most traded ETF YTD by turnover 1st most traded ETF by trades on Borsa Italiana in October 2008 (10% market share) MOST TRADED IN THE MONTH BY TRADE SYMBOL NAME DAILY AVERAGE TRADE SIZE MS% CAC 1 LYXOR CAC MSE 2 LYXOR EURO STOXX BX4 3 SGAM CAC XBEAR EUE 4 ISHARES EURO STX EUEA 5 ISHARES EURO STX GXE 6 ISHARES DJEURSTX DAX 7 LYXOR ETF DAX L40 8 SGAM CAC 40 LEVERAGE CSH 9 LYX.ETF EUROCASH C40 10 CASAM ETF CAC October 2008 MOST TRADED IN THE YEAR BY TURNOVER Société Générale Asset Management 4

5 SGAM ETF Product pay-offs Société Générale Asset Management 5

6 SGAM ETF Structured ETFs encompass key attractions of ETFs Liquid, simple and flexible Continuously traded Traded on the exchange like any other stock Bought and sold through brokers / bank s on-line trading platforms Transparent Unique transparency standard within the structured products universe... Exposure to Index and Indicative Net Asset Value (INAV) displayed at any time Underlying reference portfolio transparency Performance re-calculable from Index performance Price quoted on the exchange Cost efficient No entry / exit fee (only usual brokerage fees) Lower costs than products offering similar risk profiles Société Générale Asset Management 6

7 What uses of ETFs in the Hedge Funds world? Hedge Funds have revolutionized asset management through the systematic use of leverage and short-selling techniques. These techniques are now available in ETF form Breadth of strategies: ETFs worldwide provide indexation on much wider array of strategies than futures market - Comprehensive segmentation - ETF are facilitating access to incremental markets (e.g single country emerging market, CDS, listed Private Equity..) open new horizon for hedge funds and investors willing to achieve similar objectives. Sector rotation : expansion of sector-based ETFs have considerably simplified sector-allocation strategies non achievable through futures Derivatives crisis is an opportunity : - Hedge Funds can reduce their counterparty exposure to OTC derivatives by turning to ETFs - Hedge Funds can rely on a shrinking number of counterparties Leveraged, short, leveraged short ETFs: - Can provide embedded leverage without tapping credit lines - Short exposure without stock or equity basket borrowings - Short ETFs not impacted by short selling restrictions so far Growing and more liquid market for ETF borrowing and lending open new investment horizons Alternative beta ETFs now offer equitization and cash management tools for alternative portfolios and funds of funds Société Générale Asset Management 7

8 Why chose ETFs to gain leverage / short exposure in an institutional portfolio? No daily margin call Time and cost saving in back office administration No quarterly or monthly roll of futures No management of deposits financing placement or hedging No swap with external counterparty Available to investors not allowed or facing limitations in the use of derivatives Investors who do not want to take on additional debt Leverage in a simple UCITS III fund Transparent cost Not sensitive to unexpected changes in dividend flows affecting futures Can be used as a substitute for futures or certificates Société Générale Asset Management 8

9 SGAM ETF Liquid products Liquidity equal to the one of underlying assets Three main liquidity providers: Market-makers or authorised participants Competitive spread ensuring that the ETF s price remains close to the INAV Execution depending on the investor profile Primary market beyond 4 millions Société Générale Asset Management 9

10 SGAM ETF Bear/XBear Inverse exposure

11 SGAM ETF Bear / X Bear Characteristics designed to have a reverse exposure to the index variation within the following limits: SGAM ETF Bear 100% daily SGAM ETF XBear 200% daily SGAM Alternative Investments 11

12 SGAM ETF Bear & XBear Concept BEAR Long Stock basket of the index A + Dividends Selling Future A Selling of the basket + EONIA - Dividends Short Selling Future A Reverse exposure 100% +EONIA - Dividends 2 x EONIA Reverse performance Max 100% + 2 x EONIA -1 x Div Long Stock basket of the Index A Selling Future A Selling of the basket Short Selling 2 Future A Reverse exposure 200% + Dividends + EONIA + EONIA - Dividends - Dividends 3 x EONIA XBEAR Reverse performance Max 200% + 3 x EONIA -2 x Div Société Générale Asset Management 12

13 SGAM ETF Bear/ XBear Net performance since inception as of 26/11/ juil.-07 sept.-07 nov.-07 janv.-08 mars-08 mai-08 juil.-08 sept.-08 SGAM ETF XBear DJ EURO STOXX 50 DJ EURO STOXX 50 BXX: % DJ Eurostoxx 50 : % Since 03/11/2006 Société Générale Asset Management 13

14 Long ETF Bear versus Short Futures Convexity ETF % % % % 50.00% 0.00% 0% 50% 100% 150% 200% 250% Sous-Jacent ETF % % % % % 0.00% % % 0% 50% 100% 150% 200% 250% Sous-Jacent ETF BEAR 1Y-Euribor at 08/12/ % Fees 0.60% Volatility 10% Exposure -1 Maturity 1 ETF XBEAR 1Y-Euribor at 08/12/ % Fees 0.60% Volatility 10% Exposure -2 Maturity 1 Difference between fixed-delta ETF and a futures contract is convexity Bear ETFs provide however good proxy for hedging purpose Société Générale Asset Management 14

15 SGAM ETF T-Rex 1st alternative beta ETF

16 The emergence of clones Hedge funds have an appealing risk/return profile ( ) Why replicate hedge funds returns? Superior risk-return profiles Moderate and time-varying correlation with standard assets December 96 - August 2008 S&P US Treasuries HFR FoF HFRI HFRX C.S/TREMONT (10-yr) Annualized return 6.6% 6.0% 7.0% 9.4% % Volatility 15.0% 6.9% 6.1% 7.2% % Sharpe (risk-free rate = 4%) Correlation matrix Cumulative Performance December 96 - August S&P US Treasuries (10-yr) HFR FoF HFRI HFRX Cumulative gross performance for all indices excepted HFR Period: 31/12/ /08/2008. The HFRX (investable) index was created in March Société Générale Asset Management 16

17 The emergence of clones Replicants cannot be deemed competitors for (best) hedge funds Replicants are not competitors to the best (fund of) hedge funds but are completing them Their success depends on the success of hedge funds themselves. Replicants are directed to investors: Who cannot directly invest in hedge funds for regulatory or related reasons (liquidity, transparency) and want to get access to a diversified fund with less constraints (long/short, leverage ) than traditional ones Who are already invested in traditional hedge funds (including FoHF themselves): Core-satellite approach Cash equitization Managing exposures in the short run with the Short and the Leveraged versions Enhanced expositions for structured products mixing baskets of illiquid funds and replicatants... Who think they have no skill in selecting funds and who think that average alpha has decreased with growing AuM so that the risk surrounding fund picking has increased Société Générale Asset Management 17

18 Hedge fund risk/return replication and alternative beta The principles of alternative beta At the first order level, active management by hedge funds is still the active management of the exposure to the underlying market, i.e. the beta. Alternative beta Denotes the ability of hedge funds to modify their exposures to the markets, as they anticipate changing trends. This a top-down process. Alpha Beta Where hedge fund returns come from? 60% 40% True alpha Dynamic (alternative) beta Static beta 15% 45% 40% Replicator target Very different from static beta, which denotes fixed exposures to standard assets. Part of what is traditionally described as alpha (outperformance above static beta) is actually derived from dynamic beta (varying across time). Simplistic breakdown Realistic breakdown Theoretical illustration of hedge funds return breakdown Source: An alternative approach for Alternative beta, Journal of Financial Transformation, 2008 If If we we can identify the the aggregate hedge fund exposure to to (investable) standard assets, then we we should also be be able to to capture a significant proportion of of the the hedge fund universe returns, i.e. i.e. the the sum: fixed beta + dynamic betas ( alternative ) Société Générale Asset Management 18

19 T-Rex methodology (Total Return Exposure) How to extract the alternative beta? A 3 step approach : 1. Which index to replicate? We have chosen HFRI: representativity of Hedge Funds performance, longest performance history 2. What traditional assets to be used for replication? We selected assets which combine best representativity of Hedge Fund positions, trading cost efficiency, high liquidity and simple valuation 3. How to estimate exposure levels: We chose the Kaldman filter, more reactive in reflecting exposure changes in the Hedge Fund universe, while avoiding non significant and too costly exposure adjustments. Weightings are revised monthly Société Générale Asset Management 19

20 T-Rex (Total Return Exposure) Methodology: The chosen hedge fund index Step 1: What index to replicate? Monthly returns of various hedge fund indices We have chosen the HFRI, why: 5% 4% 3% Representativity: more than 2000 Hedge 2% Funds worldwide from all strategies 1% One of the longest performance history 0% -1% One of the most recognized indices -2% CISDMEW HEDGNAV HFRIFWi EHFI251-3% -4% Source: Bloomberg GVAINDX MSHFCIEW BGHSHEDG MSHFCIAW -5% Source: Bloomberg Société Générale Asset Management 20

21 T-Rex (Total Return Exposure) Methodology: The choice of factors Step 2 : What factors? A trade-off between representativity of the hedge fund universe and liquidity/capacity considerations Asset classes currently used within the T-Rex strategy: S&P 500 TR index Russell 2000 TR DJ Euro Stoxx 50 TR Topix TR 10-years US Treasury EUR/USD exchange rate YEN/USD exchange rate Emerging markets (Hang Seng, HSCEI, Bovespa, Kospi) Allocation is published monthly on and This basket of underlying assets might evolve in the future: Changes will be pre-announced and should remain exceptional Modifications will be motivated by one of the following reasons: A drift in hedge fund exposures that our models would be continuously monitor Increased liquidity on futures contracts which might appear as representative of hedge fund exposures (e.g. credit) Société Générale Asset Management 21

22 T-Rex (Total Return Exposure) Methodology: Estimating asset class exposure Step 3 : What econometric methodology? Standard econometric approaches (rolling OLS) are not designed for this or involve ad-hoc parameters (the size of the window) The Kalman filter is an adaptative algorithm which is particularly efficient if one aims to estimate time-varying coefficients: Exposures only change if the observed returns significantly differ from what was forecasted with previous coefficients Very reactive Permanently analyses the previous allocation and coefficients to identify the reason of failure and find a way to do better in the future Advantages: cost reduction, greater stability, less volatility with smaller drawdowns Backtest of replicators of HFRI index according to the different econometric methodologies (January February 2007; gross monthly returns) Rolling OLS HFRI Weighted Fund composite 24 months Kalman filter Average return in excess of cash (% per year) 5.0% 5.3% Standard deviation (% per year) 8.1% 7.4% Sharpe ratio (risk-free rate Libor 1M) Maximum drawdown 18.70% 9.70% Source: An alternative approach to alternative beta, SGAM AI working paper Société Générale Asset Management 22

23 Backtesting : Correlation with the HFRI Index Two year rolling T-Rex (I shares) with the HFRI index (monthly returns) 1999/ % Two-years rolling correlation with the HFRI index (monthly returns) 95% 90% 85% 80% 75% 70% 65% In Sample Out-of-sample 60% 55% 50% Jan 1997 to June 2007 T-REX (J share) HFRI HFR FoF S&P 500 TR Average compound return 8.3% 10.8% 8.3% 8.7% Volatility 7.3% 7.2% 5.9% 15.1% Maximum Drawdown 10.9% 11.4% 13.1% 44.7% Sharpe ratio (Risk free rate = 4%) Source: SGAM AI Monthly returns. T-Rex is net of fees (J share). HFRX is net of platform fees. S&P is gross of fees. (*) Important remarks - To be as realistic as possible, the backtest is including a lag in implementing the exposures ( out-of-sample ). The backtest where exposures are assumed to be known contemporaneously ( in-sample ) will lead to a 0.50% higher average return with a slight reduction in volatility. Société Générale Asset Management 23

24 Backtesting : Comparison with investable indices On a gross basis, T-Rex would have outperformed the HFRX investable index (launched in April 2003, in USD), both on a nominal and risk-adjusted basis. It would have shown strong and stable correlation (annualized tracking-error below 3%) On a risk-adjusted basis, T-Rex would have largely outperformed equity indices like the S&P 500 Total Return Index even during a strong bull market (2003 onwards). 100% 90% 80% 70% T-Rex correlation with HFRX index (J shares) 60% 50% Daily returns Weekly returns 40% Apr 2003 to June 2007 T-REX (J share) HFRX S&P TR Average compound return 10.8% 7.4% 16.4% Volatility 5.0% 3.1% 11.2% Maximum Drawdown 5.6% 4.8% 7.5% Sharpe ratio (Risk free rate Libor1M) Source: SGAM AI Daily returns. T-Rex is net of fees (J share). HFRX is net of platform fees. S&P is gross of fees. Important remarks - To be as realistic as possible, the backtest is including a lag in implementing the exposures ( out-of-sample ). The backtest where exposures are assumed to be known contemporaneously ( in-sample ) will lead to a 0.50% higher average return with a slight reduction in volatility. Société Générale Asset Management 24

25 SGAM AI T-Rex Fund Realized performances since inception Net Performance (I Share) From 01/08/07 (inception - base 100) to 28/11/2008, cumulative, in EUR with daily data (I Share) SGAM AI Trex HFRXGL in Euros HFRI in Euros (Monthly Data) 08/07 09/07 10/07 11/07 12/07 01/08 02/08 03/08 04/08 05/08 06/08 07/08 08/08 09/08 10/08 11/08 Source: SGAMI AI The figures shown in this document are those applicable for the years mentioned. Past performance are not a guarantee for future results, they are not constant over time Performance in % 1 month 3 month 1 year YTD From 01/08/07 to 28/11/2008 SGAM AI T-Rex Fund - I Share -2.42% % % % HFRXGL EUR -2.70% % % % HFRI (hedged in Euros)* -1.08% % % % HFRI FoF (hedged in Euros)* -1.29% % % % Monthly correlation with HFRXGL EUR Volatility of SGAM AI T Rex fund Since Inception % % % % 70.19% 12.17% Société Générale Asset Management 25

26 SGAM ETF T-Rex Main features Société Générale Asset Management 26

27 The T-Rex range From the Hedge Funds replication to a range of alternative beta tools A comprehensive range of simple and liquid tools ETF T-Rex 1 st global ETF to capture the Hedge Funds beta T-Rex (UCITS III) delta One exposure to Hedge Funds beta Reverse T-Rex (UCITS III) reverse exposure to Hedge Funds beta for hedging issues or to extract alpha Leveraged T-Rex x 2 (UCITS III) Dynamic version capturing stocks volatility, higher Sharpe ratio Options : calls, puts on T-Rex T-Rex as underlying : an ideal solution for structured products Société Générale Asset Management 27

28 Disclaimer No products and/or services may be offered by a company within the Société Générale Asset Management Group to an individual or an entity if the law in his country of origin or any other country concerning the person or entity, product or service prohibits it. Furthermore, the products and services described therebefore can only be subscribed within the jurisdictions in which their marketing and promotion are authorized. For instance, products and services cannot be sold in the United States or any of its territories or ownerships. They cannot be marketed to legal entities or individuals in the United States nor to citizens of the United States. Société Générale Asset Management therefore recommends that all interested parties ensure that they are legally authorized to subscribe to the products and/or services offered therebefore, before any investment is made. SOCIETE GENERALE ASSET MANAGEMENT S.A. A French public corporation(sa) with a capital stack of EUR 302,219, Identification number : B RCS Nanterre APE number 671C Head office : 170 place Henri Régnault Courbevoie FRANCE Chief Executive Officer : Jean Pierre Mustier Société Générale Asset Management 28