Alternative Investments US First Quarter 2009: Quarterly Hedge Fund/Managed Futures Commentary

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Alternative Investments US First quarter 2009: Quarterly hedge fund/managed futures commentary

We are pleased to present you with a brief general review of financial markets, hedge funds and managed futures strategies for the first quarter of 2009.

Market overview The first quarter of 2009 was somewhat similar to the fourth quarter of 2008 U.S. equity markets began the period with a pronounced negative move and then ended with a strong positive move⎯a blistering 20% gain in ten trading days⎯during the third month. During the quarter, small- capitalization stocks were hit harder than their large-cap counterparts, and value significantly underperformed growth with the Russell 1000 Value Index dropping 16.77% versus a decline of 4.12% for the Russell 1000 Growth Index. Technology was the only S&P 500 sector which gained during the quarter. Global stocks were slightly more impacted than U.S. stocks, although emerging markets were surprisingly firm. The net result was another negative quarter for equities, but roughly half as bad as the prior quarter. Generally, credit markets ran counter to this trend, enjoying a relief rally in January followed by two more challenging months.

Economic news continued to weigh on the mood of investors with many analysts reducing expectations for growth in 2009 though some are calling for improving conditions in the second half. The government has been busy coordinating multiple solutions supported with trillions of dollars to ease credit conditions, jump-start the economy and fight asset deflation.

Most hedge fund strategies had a favorable showing, with several of them generating profits while traditional indices posted double-digit losses. Two prominent factors that contributed to the gains were the end of selling pressure in hedge fund positions associated with funding year-end redemptions and more conservative exposure management—a combination of less long and more short positioning. The managed futures and global macro strategies were an exception that had small losses after standout performances last year.

Market indices Q1 S&P 500 -11.01% MSCI World -11.92 Russell 2000 -14.95 Barclays Aggregate Bond 0.12 3-Month Treasury Bill 0.10 Hedge fund indices HFRI Funds-of-Funds: Diversified 1.06 HFRX Equity Hedge 0.76 HFRX Event-Driven 2.29 HFRX Macro Index -0.62 HFRX Relative Value Arbitrage 1.45 Barclay CTA (estimated) -1.30e Source: UBS, BarclayHedge, Hedge Fund Research. Through March 31, 2009

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Hedge fund strategy overview Equity-Hedge Generally, equity long/short managers were positioned defensively and benefited from good dispersion between good and bad companies during January and February-- positioning that produced flat-to-positive returns amid the broader equity markets' large losses. This same posture weighed down returns during March when the stock market rallied strongly. Nonetheless, quarterly returns were reasonably good from both absolute and relative perspectives. The major issue confronting equity long/short managers is how to balance the attractiveness of very cheap stock valuations against the systemic risk of the economy and a handful of major companies whose viability is in question.

Event-Driven/Credit Helped by a halt to the redemption-related selling pressure from the fourth quarter, event-driven strategies performed well as spreads firmed on some deals and a few special situation positions improved. High-profile announcements in the healthcare sector about completed and prospective multi-billion dollar mergers were a boon.

Credit strategies enjoyed a short-lived bounce in January, but it did not last long enough to help the quarter as evidenced by the 5.16% decline in the HFRX Distressed Securities Index. Despite the headlines that credit spreads tightened during the quarter, the market was bifurcated between larger, widely held names that did well and less-liquid names that did not. There were several government announcements highlighting the urgency to ease credit conditions, primarily the TALF (Term Asset-Backed Securities Loan Facility, essentially a replacement for the lack of a functioning asset-backed commercial paper market) and the PPIP (Public-Private Investment Program, another potential solution to move hard-to-value or illiquid assets from balance sheets to investors).

Managed Futures/Global Macro These strategies experienced mixed results as volatile markets caused trend reversals in many markets, particularly equities and currencies. Some traders in fixed-income were surprised by the U.S. Treasury's announcement to purchase government bonds in the open market, an aggressive move which resulted in a sharp drop in yields. Energy and agricultural commodities closed higher.

Relative Value Last year’s worst category got off to a strong start this year. After the fourth quarter's significant selling pressure abated, the convertible bond market enjoyed a big bounce, with the HFRX Convertible Arbitrage Index up 9.43%. Other fixed-income arbitrage strategies had positive, but more modest, returns.

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Hedge fundindex definitions The use of indices is for illustrative purposes only. Some indices are unmanaged, are not available for direct investment and are not subject to management fees and other fees and expenses. Information about the index is derived from sources that we believe to be reliable, but we have not independently verified them and we do not warrant as to its accuracy or completeness.

HFRI Fund-of-Funds: Diversified Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio. A manager may allocate funds to numerous managers within a single strategy, or with numerous managers in multiple strategies. The minimum investment in a Fund of Funds may be lower than an investment in an individual hedge fund or managed account. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers.

HFRX Equity Hedge Index An investable, asset-weighted index designed to be representative of the long/short equity strategy. This strategy is a combination of long equity holdings with short sales of stocks or stock index options. Portfolios included in this index may have net-long or net-short exposures depending on current market conditions. This index is actively managed and performance is stated net of management and incentive fees of the underlying managers. Results could be lower if the additional fees charged for the management of this index were included in performance.

HFRX Event-Driven Index An investable, asset-weighted index designed to be representative of the event-driven strategy. Managers engaged in this strategy invest in companies where opportunities are created by corporate transactional events such as mergers and acquisitions, consolidations, share buybacks, spin-offs, liquidations and other corporate transactions. Managers may invest in instruments such as long and short common and preferred stock, debt, warrants and options.

HFRX Relative Value Arbitrage Index An investable, asset-weighted index designed to be representative of the relative-value arbitrage strategy. Relative Value Arbitrage is a multiple investment strategy approach. The overall emphasis is on making "spread trades" which derive returns from the relationship between two related securities rather than from the direction of the market. Generally, trading managers will take offsetting long and short positions in similar or related securities when their values, which are mathematically or historically interrelated, are temporarily distorted. Results could be lower if the additional fees charged for the management of this index were included in performance.

Risk disclosures This material is intended for informational purposes only. UBS Financial Services Inc. ("UBS-FS") is not soliciting or recommending any action based on this material and this material does not represent an offer to buy or sell or the solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

Any opinions expressed or information provided in this document is presented as of the date hereof and is subject to change without notice, and UBS-FS has no obligation to update such opinion or information. Past performance is no indication of future results.

Although all information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its accuracy or completeness, and it may not be relied upon as such. Certain statements herein may constitute projections, forecasts and other forward-looking statements that do not reflect actual results and are based primarily upon applying retroactively a set of assumptions to certain historical financial information. Any industry outlook or conclusions herein are for informational purposes only and should not be relied upon.

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