G.I.ALTERNATIVE HEDGE STRATEGY OCT 2012 GICAPITALG.I. Alternative Hedge Strategy Pool•The Alternative Hedge Strateg y is an alternative to traditional bond funds, which although carry very low credit risk, currently have minimal return; and to equity funds that exhibit high volatility. •The Alternative Hedge Strategy seeks to invest in alternative strategies like hedge funds, private equity, and real estate, which offer higher returns, at a reasonable risk, while minimizing exposure to global stock and bond markets. The fund provides access to sophisticated private investment vehicles traditionally reserved for large pension plans and the ultra high net worth investors. •The strategy’s objectives are to preserve capital, minimize volatility, have a low or zero correlation with stock and bond markets, and achieve an annual return of 7-9% net of fees. The pool is a core holding across all of GI’s managed accounts. PORTFOLI O PERFORMAN CE FOR A LTERNATI VE H EDGE STRATEGYYear Jan Fe b Mar A p r Ma y Ju n Jul Au g Se p Oc t Nov Dec Total 2011 -0.07% -0.07% 2012 0.31% -0.16% 0.61% 0.19% 3.28% -1.19% -0.70% 0.34% 1.67% 1.52% 5.95% STRATEGY COUNTRY D ESCRI PTI ONSecuritized Fixed Income US Long senior or mezzanine tranches of securitized bonds (RMBS, CMBS, CDOs, CLOs) through granular analysis of underlying assets in the pool. Hedged through tactically shorting the ABX (RMBS Index), etc. High Yield Bond Strategies US Publically traded bonds that have fallen below 75% of their par value. High current yields and yield to maturity. Some hedging through shorts on equities and non-distressed bonds. Private Distressed Debt US Private placements into charged off consumer debt at a severe discount to face value (ie 1-2% of par value). Purchased from distressed banks trying to clean up their balance sheets. Hedged Fixed Income CAN High quality fixed income fund which has been hedged against a rise in interest rates. Distressed Real Estate US Private placements into real property with positive cash f lows, purchased at significant discounts to replacement cost. This monthly update does not constitute or purport to constitute a complete description of the G.I. Capital Corp. Alternative Hedge Strategy and is in all respects subject to the more detailed provisions found in the fund's declaration of trust. The Alternative Hedge Strategy is on ly available to GI clients w ho have engag ed GI to manage their a ccount under the alternative income/he dge mandate as ou tlined in their investment policy statement. The retur ns above are n et of all fees, other than man agement fees. The references to the target rates of return are provided for illustrative purposes only and there can be no assurance that the fund will be able to achieve the targeted rates of return. INVESTMENT BY ASSET CLASS4% 25% 17% 8% 6% 33% 8% Distressed Real Estate Hedged Fixed Income High Yield Bond Strategies Global Macro Private Distressed Debt Securitized Fixed Income Cash FEATURE INVESTMENT Hedged Fixed Income Fund: This is a hedge fund strategy that owns high quality long maturity bonds, but has hedged out the duration risk, ie the risk ofinterest rates rising over time and depressing the value of the bonds, as yields rise. We like this strategy as it provides a solution some of the challenges facing investors in the current fixed income environment. With so much risk in the equity markets, investors have flocked to short term bonds, pushing the prices up and the yields to maturity down. As a result short term investment grade bonds pay very little. On the other hand, longer term bonds still have very reasonable yields, a result of investors avoiding the longer end of the curve due to the duration risk. Being able to capture high coupons on high quality investment grade bonds while hedging out the risk of rising rates is a ve ry attractive strategy in the current environment. In addition to this core strategy, the fund can also add additional alpha by tactically adjusting duration on a short term basis, depending on the prevailing investment climate. In fact, they are able to position the fund with negative duration, meaning that the fund would profit from rates moving up, as opposed to a traditional bond portfolio that would lose value under that scenario. The expected return profile for this strategy is 7-8%/annum net. MONTH PERFORMANCE BY STRATEGY0.28% 0.00% 1.00% 2.84% 0.73% 0.53% Other Distressed Real Estate Private Distressed Debt Securitized Fixed Income High Yield Bond Strategies Hedged Fixed Income
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