Water and Power Employees’ Retirement Plan (WPERP) Investment Portfolio

Quarterly Report Executive Summary

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from Pension Consulting Alliance, Inc.

Nothing herein is intended to serve as investment advice, a recommendation of any particular investment or type of investment, a suggestion of the merits of purchasing or selling securities, or an invitation or inducement to engage in investment activity.

Pension Consulting Alliance, Inc. March 2011

Quarterly Report Q1-11

HEDGE FUND OF FUNDS PORTFOLIO SUMMARY

As of March 31, 2011, WPERP’s Retirement Plan of Funds Portfolio had an aggregate value of $39.9 million, including $3.4 million in residual PAAMCO assets. The WPERP Health Plan had an aggregate value of $8.6 million, including $0.7 in residual PAAMCO assets.

Recent Investment Performance Trends

During the most recent quarter, the WPERP Hedge Fund of Funds Portfolio outperformed its policy benchmark by 1.5%, net of fees. Over the latest 1-year period, the portfolio outperformed its Tbills + 3% benchmark by 3.1%, net of fees. The Portfolio trailed its policy benchmark over the latest 3-year time period. Underperformance over longer time periods can be attributed to severe market corrections in 2008. However, due to a strong 2009-2011, longer-term performance continues to improve.

Since inception, portfolio performance has been positive, resulting in no principal loss.

The Total Portfolio surpassed the Median Fund over all time periods. The WPERP portfolio added significant value over the Median Fund since inception, outperforming 3.3%, net of fees.

Recent Investment Performance* Hedge Fund of Funds Performance vs. Policy Benchmark

Month Quarter YTD 1 Year 3 Year Since Inc.**** Total Portfolio 0.7 2.2 2.2 6.2 2.1 3.1 Policy Benchmark*** 0.3 0.7 0.7 3.1 3.5 4.5 Excess Return 0.4 1.5 1.5 3.1 -1.4 -1.4

Performance vs. Median Fund** Month Quarter YTD 1 Year 3 Year Since Inc.**** Total Portfolio 0.7 2.2 2.2 6.2 2.1 3.1 Median Fund** -0.3 1.1 1.1 4.4 -1.3 -0.2 Excess Return 1.0 1.1 1.1 1.8 3.4 3.3 *Net of Fees **HFRI Conservative Index ***Benchmark is Tbills + 3% ****Inception is 2/2007

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Quarterly Report Q1-11

WPERP Hedge Fund of Funds Risk/Return Analysis Period ending March 31, 2011

Since Inception Annualized Risk/Return 10.0%

8.0%

Barclays Aggregate 6.0%

Tbills + 3 WPERP Hedge FoF 4.0% Aggregate

2.0%

Annualized Return Tbills HFRI Diversified 0.0% S&P 500 HFRI Conservative -2.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Standard Deviation

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Quarterly Report Q1-11

WPERP Hedge Fund of Funds Performance Charts WPERP Hedge Fund Total Period ending March 31, 2011

Growth of $100 Monthly Returns versus Tbills +3% WPERP Hedge Total S&P 500 Index Net of Fees Tbills + 3% 130 120 3 WPERP Hedge 2 110 Total 1 Excess 100 0

-1 90 -2

80 -3 Growth of $100 -4 Excess Return, % Return, Excess 70 -5

-6 60 -7 50 1.5 -8 Jan-07 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Mar-11 Feb-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

1 12-Month Rolling

0.5

0

S&P 500 -0.5 BC Aggregate MSCI ACWI ex US ML Global Bond -1

-1.5

-2 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 4

Quarterly Report Q1-11

Actual Asset Allocation Comparison* – Hedge Fund of Funds Portfolio, March 31, 2011

Aetos WPERP Hedge Fund of Funds Total

0.0% 5.0% 0.0% 5.0% Quantitative Quantitative 20.0% 20.0% Distressed Distressed 20.0% 20.0% ‐Biased Short‐Biased Equity Hedged Equity Hedged 6.0% 6.0% Directional Equity Directional Equity 2.0% 2.0% Fixed Income 9.0% 9.0% Convertible Arbitrage Event Driven Event Driven 3.0% 3.0% 35.0% Cash Cash 35.0%

*Please refer to Glossary Section for a list of Strategy Definitions. 5

Quarterly Report Q1-11

WPERP Hedge Fund of Funds Performance Charts Aetos Period ending March 31, 2011

Monthly Returns versus Tbills +3% Growth of $100 Aetos WPERP S&P 500 Index Tbills + 3% Net of Fees 130 120 3 Aetos WPERP 110 2 1 Excess 100 0

90 -1

-2 80 Growth of $100 -3

70 Excess Return, -4%

-5 60 -6

50 -7 Jan-07 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Mar-11 Feb-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 1 12-Month Rolling Beta

0.5

0

S&P 500

BC Aggregate

-0.5 MSCI ACWI ex US

ML Global Bond

-1

-1.5 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 6

Quarterly Report Q1-11

Manager Allocation and Turnover Period ending March 31, 2011 Aetos Fund % Status Fund % Status

Hedged Equity- Convertible Arbitrage Strategy Allocation Additions Deletions Bay Pond Partners, LP CNH Convertible Arbirtrage Hedged Equity 2 0 Brookside Capital Ishin Fund LLC Merger Arbitrage 1 0 Cadian Fund, LP Subtotal 6.00% Fixed Income Arbitrage 0 0 Conatus Capital Partners, LP Direc tional 0 0 CamCap Energy Relative Value Convertible Arbitrage 0 0 Joho Partners, LP GMO Reversion to Mean Fund Relative Value 0 0 AQR RT Fund Short Biased 2 0 Millgate Partners II, LP Subtotal 5.00% Dis tres s ed 0 0 North River Partners, LP YTD Turnover 50 Route One Fund, LP Short-Biased Credit/Equity Samlyn Onshore Fund, LP New 1Q2011 GMO U.S. Tactitcal Opportunities New 1Q2011 The Elkhorn Fund New 1Q2011 Harrier Haw k Four Horseman New 1Q2011 Tiger Consumer Ursus Partners Viking Global Equities LP Subtotal 2.00% Subtotal 38.00% Distressed Merger-Event Driven Arbitrage AG Mortgage Value Davidson Kempner Partners, LP Anchorage Capital Partners, LP Offshore Investors, Inc. Aurelius Capital Partners, LP Luxor Capital Partners, LP New 1Q2011 Centerbridge Credit Oceanw ood Global Opportunities Fund, LP Davidson Kemper Subtotal 20.00% King Street Capital, LP Watershed Capital Partners, LP Fixed Income Arbitrage Subtotal 20.00% Bracebridge FFIP, LP Parsec Trading Corporation Subtotal 9.00%

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Quarterly Report Q1-11

Latest Quarter During the first quarter for the WPERP Portfolio, Aetos hired five new managers, Luxor Capital Partners, Harrier Hawk Four Horseman Fund, The Elkhorn Fund, GMO U.S. Tactical Opportunities Fund, and Samlyn Onshore Fund, while making no terminations.

Additions

 Luxor Capital Partners, LP (2/1/11) – Luxor Capital Partners is an event-driven fund run by Luxor Capital Group, which was founded in 2002 by Christian Leone with seed capital from Perry Capital. The Fund pursues a broadly defined event-driven mandate across the , which gives the Fund flexibility in pursuing the best risk/reward opportunities across cycles. The Fund differentiates itself from its larger peers through its ability and willingness to build core positions in less trafficked areas of the event- driven universe and its commitment to managing an active short portfolio. Accordingly, Aetos made an investment in the Fund due to its diversification benefits to the other event-driven managers within the Portfolio.

 Harrier Hawk Four Horsemen Fund LP (1/1/11) – Harrier Hawk Four Horsemen Fund is a concentrated short-only equity fund run by Harrier Hawk Management LLC, a firm founded by Wayne Chambless, formerly a portfolio manager working with Jim Chanos at Kynikos Associates.

The Fund employs a fundamental research process, with a focus on U.S. equities. The Fund’s investment philosophy is to find idiosyncratic positions where the fundamentals of the company and current valuation provide attractive upside to a short position. Companies generally fall into one of three categories: earnings/accounting issues, fundamental industry changes, and over-hyped . Aetos made an investment into the Fund as it will help diversify the Portfolio’s short-biased equity exposure, which improves the risk-adjusted returns of the overall Portfolio as it should dampen the Portfolio’s volatility while maintaining or potentially adding to overall Portfolio returns over a full market cycle.

 The Elkhorn Fund, LLC (1/1/11) – The Elkhorn Fund is a multi-strategy /short equity fund that employs a long-term, value- oriented strategy. The Fund was added to the Portfolio as a result of the Aetos Capital Opportunities Fund merger into Aetos Capital Long/Short Strategies Fund, approved by investors on October 29, 2010.

 GMO U.S. Tactical Opportunities Fund (1/1/11) – The GMO U.S. Tactical Opportunities Fund is a quantitative long/short fund that focuses on the relative valuation of high quality versus low quality stocks, as defined by GMO’s research process. The Fund was added to the Portfolio as a result of the Aetos Capital Opportunities Fund merger into Aetos Capital Long/Short Strategies Fund, approved by investors on October 29, 2010.

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Quarterly Report Q1-11

 Samlyn Onshore Fund, LP (1/1/11) – Samlyn Onshore Fund follows a value oriented long/short strategy that relies on bottom-up fundamental research. The Fund seeks to identify critical factors that will trigger a meaningful price change for investments, and is primarily focused on the Financial, Healthcare and Industrial/Old Economy sectors. The Fund was added to the Portfolio as a result of the Aetos Capital Opportunities Fund merger into Aetos Capital Long/Short Strategies Fund, approved by investors on October 29, 2010.

Terminations

. No terminations during 1Q2011.

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Quarterly Report Q1-11

Hedge Fund and Hedge Fund of Funds Industry Overview

For the first time in its history, Hedge Fund assets topped $2 trillion. This represents over a 50% increase since the financial crisis in 2008. Public markets also added value in the first quarter of 2011 but with much higher levels of volatility. The long-term impact of such asset growth remains to be seen as regulators are still working to tighten oversight and guidelines within the industry in an attempt to better protector investors.

However, hedge fund managers still experience a decrease in the ability to use leverage and credit to conduct trades and cover positions with brokers.

CAPITAL ALLOCATED TO HEDGE FUNDS (as of 3/31/2011)

2500

2000

1500

$ Billions 1000

500

0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: HFR

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Quarterly Report Q1-11

The strong performance in 2010 and the first quarter of 2011 played out across the various hedge fund sectors, with event driven strategies returning 10.3% over the previous 12-month period. All of the major hedge fund styles added value in the first quarter of 2011 as a reduction in economic uncertainty drove up investor confidence.

BREAKOUT OF HEDGE FUND INDUSTRY BREAKOUT OF HEDGE FUND INDUSTRY By Major Strategy type By Assets Performance by Sector (as of 3/31/2011) (as of 3/31/2011)

Quarter 1 Year 3 Years 5 Years 10 Years HFN Event Driven 2.7 10.3 7.6 6.4 8.6 Opportunistic 49% HFN Macro 0.0 7.1 5.3 6.9 8.6 HFN Relative Value 2.0 9.1 5.8 6.0 7.1

HFN Equity Hedge 1.6 9.1 4.8 4.8 8.1 Event Driven 26% Relative Value 25%

Source: HFR

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Quarterly Report Q1-11

Glossary The premium an investment earns above a set standard. This is usually measured in terms of a common index (i.e., how the performs independent of the market). An Alpha is usually generated by regressing a ’s excess return on the S&P 500 excess return.

Annualized Performance The annual rate of return that when compounded t times generates the same t-period holding return as actually occurred from period 1 to period t.

Beta The measure of an asset’s risk in relation to the Market (for example, the S&P 500) or to an alternative benchmark or factors. Roughly speaking, a security with a Beta of 1.5, will have moved, on average, 1.5 times the market return.

Bottom-up A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks.

Convertible Arbitrage Hedge Funds Convertible arbitrage is the trading of related securities whose future relationship can be reasonable predicted. Convertible securities are usually either convertible bonds or convertible preferred shares, which are most often exchangeable into the common stock of the company issuing the convertible security. The managers in this category attempt to buy undervalued instruments that are convertible into equity and then hedge out the market risks. Fair value is based on the optionality in the convertible bond and the manager’s assumption of the input variables, namely the future volatility of the stock.

Correlation Correlation expresses the degree to which fluctuations in one variable are related to fluctuations in another variable. It ranges from – 1 to +1.

Drawdown Drawdown measures a period of negative performance. It is generally expressed as a percentage of the net asset value.

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Quarterly Report Q1-11

Distressed Securities Hedge Funds funds invest in the debt or equity of companies experiencing financial or operational difficulties or trade claims of companies that are in financial distress, typically in bankruptcy. These securities generally trade at substantial discounts to par value. Hedge fund managers can invest in a range of instruments from secured debt to common stock. The strategy exploits the fact that many investors are unable to hold below investment grade securities.

Emerging Markets Hedge Funds Emerging market hedge funds focus on equity or fixed income investing in emerging markets as opposed to developed markets. This style is usually more volatile not only because emerging markets are more volatile than developed markets, but because most emerging markets allow for only limited short selling and do not offer a viable futures contract to control risk. The lack of opportunities to control risk suggests that hedge funds in emerging markets have a strong long bias.

Equity Market-Neutral Hedge Funds Equity market-neutral is designed to produce consistent returns with very low volatility and correlation in a variety of market environments. The investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency-neutral or both. Equity market-neutral is best defined as either statistical arbitrage or equity long/short with zero exposure to the market.

Event Driven Hedge Funds This investment strategy class focuses on identifying and analyzing securities that can benefit from the occurrence of extraordinary transactions. Event-driven strategies concentrate on companies that are, or may be, subject to restructuring, takeovers, mergers, liquidations, bankruptcies, or other special situations. The securities prices of the companies involved in these events are typically influenced more by the dynamics of the particular event than by the general appreciation or depreciation of the debt and equity markets. For example, the result and timing of factors such as legal decisions, negotiating dynamics, collateralization requirements, or indexing issues play a key element in the success of any event-driven strategy.

Fixed Income Arbitrage Hedge Funds Fixed income arbitrage managers seek to exploit pricing anomalies within and across global fixed income markets and their derivatives, using leverage to enhance returns. In most cases, fixed income arbitrageurs take offsetting long and short positions in similar fixed income securities that are mathematically, fundamentally or historically interrelated. The relationship can be temporarily distorted by market events, investor preferences, exogenous shocks to supply or demand, or structural features of the fixed income market.

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Quarterly Report Q1-11

Global Macro Hedge Funds Macro hedge funds pursue a base strategy such as equity long/short or futures to which large scale and highly leveraged directional bets in other markets are added a few times each year. They move from opportunity to opportunity, from trend to trend, from strategy to strategy.

Hedge Fund A fund (generally not regulated) that typically engages in non-conventional investment techniques and strategies, using derivatives, short positions and borrowing, thereby achieving a leveraged effect.

Long/Short Equity Hedge Funds Long/short strategies combine both long as well as short equity positions. The short positions have three purposes, which can vary over time or by manager. First, the short positions are intended to generate alpha. This is one of the main differences when compared with traditional long-only managers. Stock selection skill can result in doubling the alpha. A long/short equity manager can add value by buying winners as well as selling losers. Second, the short positions can serve the purpose of hedging market risk. Third, the manager earns interest on the short as he collects the short rebate.

Merger Arbitrage Hedge Funds Merger arbitrage (also known as ) specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. In stock swap mergers, risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. In the case of a cash tender offer, the risk arbitrageur is seeking to capture the difference between the tender price and the price at which the target company’s stock is trading.

Relative Value Strategy Hedge Funds This class of investment strategy seeks to profit by capitalizing on the mis-pricings of related securities or financial instruments. Generally, relative-value and market neutral strategies avoid taking a directional bias with regards to the price movement of a specific stock or market. This makes this style most appealing for investors who are looking for high and stable returns accompanied by low correlation to the equity market.

R-Squared Square of the correlation coefficient. The proportion of the variability in one series that can be explained by the variability of one or more other series a regression model. A measure of the quality of fit. 100% R-square means perfect predictability.

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Quarterly Report Q1-11

Sharpe Ratio This ratio is a risk-adjusted measure of a fund’s performance. It is calculated as follows [(annualized rate of return)-(annualized risk-free interest rate)] / annualized standard deviation. For example, a fund with a Sharpe Ratio greater than 1.0 is achieving more than one unit of excess return per unit of risk undertaken.

Short Selling Hedge Funds The short selling discipline has an equity as well as fixed income component. Short sellers seek to profit from a decline in the value of stocks. In addition, the short seller earns interest on the cash proceeds from the short sale of stock.

Standard Deviation The square root of the variance. A measure of dispersion of a set of data from its mean.

Top-down Investment style that begins with an assessment of the overall economic environment and makes a general asset allocation decision regarding various sectors of the financial markets and various industries.

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Quarterly Report Q1-11

Hedge Funds Characteristics and Terms

Strategies Definition Relative Value Convertible Arbitrage Invests in the convertible securities of a company. A typical investment is to be long the convertible bond and short the common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of the stock, while protecting the principal from market moves. Fixed Income Arbitrage Fixed income arbitrage managers seek to exploit pricing anomalies within and across global fixed income markets and their derivatives, using leverage to enhance returns. In most cases, fixed income arbitrageurs take offsetting long and short positions in similar fixed income securities that are mathematically, fundamentally or historically interrelated. The relationship can be temporarily distorted by market events, investor preferences, exogenous shocks to supply or demand, or structural features of the fixed income market. Equity Market Neutral Equity market-neutral is designed to produce consistent returns with very low volatility and correlation in a variety of market environments. The investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency-neutral or both. Equity market-neutral is best defined as either statistical arbitrage or equity long/short with zero exposure to the market. Event Driven Risk Arbitrage Risk arbitrage (also known as merger arbitrage) specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. In stock swap mergers, risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. In the case of a cash tender offer, the risk arbitrageur is seeking to capture the difference between the tender price and the price at which the target company’s stock is trading. Distressed Securities Distressed securities funds invest in the debt or equity of companies experiencing financial or operational difficulties or trade claims of companies that are in financial distress, typically in bankruptcy. These securities generally trade at substantial discounts to par value. Hedge fund managers can invest in a range of instruments from secured debt to common stock. The strategy exploits the fact that many investors are unable to hold below investment grade securities. Opportunistic Macro Macro hedge funds pursue a base strategy such as equity long/short or futures trend following to which large scale and highly leveraged directional bets in other markets are added a few times each year. They move from opportunity to opportunity, from trend to trend, from strategy to strategy. Short Sellers The short selling discipline has an equity as well as fixed income component. Short sellers seek to profit from a decline in the value of stocks. In addition, the short seller earns interest on the cash proceeds from the short sale of stock. Long Region, Industry, Traditional equity fund structured like a hedge fund; ie, uses leverage and permits managers to collect an incentive fee. Focus or Style of the fund could be a specific geographic region (i.e., Japan) , industry (i.e., technology) or style (i.e., growth) Emerging Markets Emerging market hedge funds focus on equity or fixed income investing in emerging markets as opposed to developed markets. This style is usually more volatile not only because emerging markets are more volatile than developed markets, but because most emerging markets allow for only limited short selling and do not offer a viable futures contract to control risk. The lack of opportunities to control risk suggests that hedge funds in emerging markets have a strong long bias. Long/Short Equity Long/short strategies combine both long as well as short equity positions. The short positions have three purposes, which can vary over time or by manager. First, the short positions are intended to generate alpha. This is one of the main differences when compared with traditional long-only managers. Stock selection skill can result in doubling the alpha. A long/short equity manager can add value by buying winners as well as selling losers. Second, the short positions can serve the purpose of hedging market risk. Third, the manager earns interest on the short as he collects the short rebate.

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Quarterly Report Q1-11

Supplemental Performance/Risk Statistics

1 year ending 3/31/2011 Net of Fees, versus the S&P 500

MPT Statistics Annualized Return, % Annualized StdDev, % Sharpe Treynor Sortino Information Batting Alpha, % Beta R-Squared, % Ratio Ratio Ratio Ratio Average* Total Excess* Total Excess* WPERP Hedge Fund Total 3.5 0.2 76.2 1.9 0.4 29.2 2.0 0.750 6.2 3.1 3.1 3.1 Aetos LADWP 2.9 0.2 76.9 1.6 0.3 16.4 1.7 0.750 5.7 2.6 3.3 3.3 BC Aggregate Bond 6.1 -0.1 24.8 1.8 -0.7 24.4 1.9 0.580 5.1 2.0 2.7 2.7 Tbills + 3 2.9 0.0 0.6 NA NA 0.0 NA 0.000 3.1 0.0 0.0 0.0 HFRI FOF: Diversified Index 1.2 0.2 79.6 1.1 0.2 5.1 1.1 0.580 4.8 1.7 4.3 4.3 HFRI FOF: Conservative Index 2.1 0.2 77.8 1.4 0.3 11.2 1.5 0.580 4.9 1.8 3.2 3.2 Merrill Lynch 3-month T-Bill 0.0 0.0 0.0 NA NA 0.0 7.4 0.000 0.2 -3.0 0.0 0.0 S&P 500 Index 0.0 1.0 100.0 0.9 0.2 3.1 0.9 0.580 15.7 12.6 18.0 18.0

*Tbills + 3%

Since inception ending 3/31/2011 Net of Fees, versus the S&P 500

MPT Statis tic s Annualized Return, % Annualized StdDev, % Sharpe Treynor Sortino Information Batting Alpha, % Beta R-Squared, % Ratio Ratio Ratio Ratio Average* Total Excess* Total Excess* WPERP Hedge Fund Total 1.5 0.2 39.0 0.2 0.1 1.0 0.5 0.660 3.1 -1.4 6.7 6.8 Aetos LADWP 0.9 0.2 43.5 0.2 0.0 1.0 0.5 0.600 2.5 -2.0 5.6 5.7 BC Aggregate Bond 4.3 0.0 3.3 1.1 1.2 12.0 1.6 0.560 6.0 1.5 3.8 3.8 Tbills + 3 2.8 0.0 2.9 15.2 17.9 0.0 8.9 0.000 4.5 0.0 0.5 0.0 HFRI FOF: Diversified Index -1.1 0.2 44.7 -0.2 -0.1 0.1 0.1 0.520 0.4 -4.1 6.7 6.8 HFRI FOF: Conservative Index -1.7 0.2 40.4 -0.3 -0.1 0.0 0.0 0.540 -0.1 -4.6 5.9 5.9 Merrill Lynch 3-month T-Bill 0.0 0.0 0.0 NA NA NA 2.8 0.000 1.7 -2.8 0.6 0.2 S&P 500 Index 0.0 1.0 100.0 0.0 0.0 0.0 0.0 0.540 0.2 -4.3 19.4 19.5 *Tbills + 3%

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