The 20 Rising Stars of Hedge Funds 2008

“Even so, we are not seeing the elimination of leverage, just a reduction in leverage.” An Alternate Theory Charles Gradante, co-founder of Hennessee, concurred that peak performance this year will have to be measured in relative terms. “You likely won’t see double-digit gains like last year,” he said. “The best case will be 10%, and that is predicated on a solid second half to the year and on oil returning to about $80 per barrel. If that happens, commodity inflation will no longer be such a threat.” Looking at other encouraging signs, Gradante noted that, although new home sales are still down, the tide appears to be turning on existing home sales. “Housing is definitely going to be coming back,” he added. “The Fed is going to be agreeable.” He stressed that a solid second half would see the housing situation improved, but not solved. He also foresees some good valuations due to the problems in the financial sector. The irony of the downturn is that these are the markets in which hedge funds shine, Gradante said. “This is where hedge funds do the sector still could lose for winning. To counter any potential scapegoating or overly zealous regulation, the Managed Funds Association (MFA) has brought in a new leader and started an ambitious outreach program to legislators, regulators and the public. “We will be much more proactive on Capitol Hill and elsewhere in explaining how this industry adds value to the economy,” said Richard Baker, former Republican Member of the House from Louisiana and new president and chief executive of the MFA. “I have been on the job three months and spent half of that time in New York and Massachusetts and on the phone to Texas and California, explaining that many pension funds and university and charitable endowments are heavily invested in hedge funds. They could not do what they do without us,” Baker continued. “And we do not like being denigrated for all of the evils of the financial sector. We are going to be much more active in making that clear.” The outreach initiative extends to state legislatures, as well as developing closer ties with the European trade group, the Alternative Investment Management Association. “We are mov- year. “You likely won’tissee double-digitagains like last half toThe best case will be 10%, and that predicated on solid second the year and on oil returning to about $80 per barrel.” — Charles Gradante well, in the flight to quality,” he added. “The traditional hedges will short weak stocks. Strategies that require a lot of leverage— including merger, credit, municipal and mortgage arbitrage—will continue to struggle.” Gradante sees better times for long-short equity strategies in the U.S. and macro-currencies overseas. “In the declining dollar, the shorts have covered, so that may go back,” he said. “If you are playing the steepening yield curve, people are going long on the two-year and short on the 10-year.” The complication for equity shorts is that the credit crunch has made it more difficult to borrow shares. “Smaller players are having to put up more collateral, and some brokers are requiring fully paid-up stock,” Gradante said. “Even those players with great track records are having trouble borrowing stock if they are highly leveraged.” Whatever the strategy, hedge funds are keeping all activity to the near term. “No one is looking out a few years right now,” Gradante noted. “We are making asset allocation decisions just for the next 12 months.” Within that shorter horizon, he foresees some recovery in the dollar, and thus in the emerging markets that are tied to the greenback. A Proactive Approach Even if 2008 turns out to be another strong year for hedge funds, ing on all points,” Baker added, “because in the absence of discussion, adverse things are bound to happen.” One of the tactics is to recognize role models among hedge fund managers. In fact, less than two months ago, the MFA announced that John Gaine, MFA special advisor and former president, was named Compliance Leader of the Year at the 6th Annual Achievement in Regulatory Compliance (ARC) Awards, presented by Institutional Investor’s Compliance Reporter. Gaine was honored for his contributions to the development of sound business practices for the hedge fund industry and for his initiative to collaborate with domestic and international organizations with the goal of establishing uniform global principles and guidance. “Jack has been at the forefront of compliance issues his entire career,” Baker said. “He began as general counsel at the Commodity Futures Trading Commission, and then served as MFA president for more than 10 years. Today, he is as a leading advocate of sound, global business practices for the hedge fund industry.” More broadly, MFA’s publication - Sound Practices for Hedge Fund Managers - is a blueprint for hedge fund managers to strengthen business practices through a framework of internal policies and procedures. It is designed to encourage individualized assessment and application of the recommendations and to enhance market discipline. i 8 HEDGE FUND RISING STARS MAY 2008

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The 20 Rising Stars of Hedge Funds 2008 Contents Looking Great for 2008 A Matter of Supply and Demand Return Performance Highlights Challenging Period 20 Rising Stars of Hedge Funds Mentors' Page

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