CONFIDENTIAL Hedge Funds: Globalization and its Consequences Please read important disclosures at the end of the presentation. Investment Products: - Not

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Hedge Funds: Globalization and its Consequences

Please read important disclosures at the end of the presentation.

Investment Products: - Not FDIC Insured - No Bank Guarantee - May Lose Value

March 2010

Michael Stohler, Ph.D.

Chief Risk Officer, Alternative Investments, JPMorgan Private Bank

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• Decline of diversification – the end of investment decision?

• Global regulation

• Investment opportunities

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Throughout history, GDP growth has been non-correlated across different regions of the world

Annual Growth 1970-2009 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 231 USA 1.0 0.6 0.3 0.6 0.9 0.4 0.4 0.2 0.4 0.5 0.3 0.0 0.0 0.7 0.1 -0.1 0.2 0.3 0.6 0.3 0.5 0.8 0.22 UK 0.6 1.0 0.3 0.6 0.8 0.5 0.5 -0.1 0.3 0.5 0.0 -0.1 0.0 0.8 0.3 -0.1 0.4 0.4 0.4 0.1 0.5 0.9 0.43 Japan 0.3 0.3 1.0 0.5 0.5 0.5 0.1 0.3 0.0 0.1 0.3 0.3 0.1 0.3 0.3 -0.2 0.6 0.6 0.9 0.3 0.4 0.4 0.34 Italy 0.6 0.6 0.5 1.0 0.8 0.8 0.6 0.5 0.0 0.3 0.0 -0.1 0.0 0.8 0.5 -0.1 0.6 0.6 0.5 0.5 0.6 0.9 0.45 Canada 0.9 0.8 0.5 0.8 1.0 0.9 0.5 0.3 -0.2 0.6 0.1 -0.1 0.1 0.7 0.5 0.0 0.4 0.4 0.5 0.5 0.7 0.9 0.96 France 0.4 0.5 0.5 0.8 0.9 1.0 0.5 0.3 -0.2 0.3 0.1 0.0 0.1 0.7 0.4 0.0 0.4 0.3 0.5 0.2 0.6 0.8 0.67 Germany 0.4 0.5 0.1 0.6 0.5 0.5 1.0 0.4 0.2 0.5 0.1 0.1 0.4 0.9 0.5 0.2 0.7 0.3 0.2 0.3 0.4 0.8 0.58 Brazil 0.2 -0.1 0.3 0.5 0.3 0.3 0.4 1.0 0.5 -0.1 0.4 0.3 0.5 0.5 0.7 0.2 0.7 0.6 0.7 0.7 0.3 0.4 0.09 China 0.4 0.3 0.0 0.0 -0.2 -0.2 0.2 0.5 1.0 0.4 0.5 0.8 0.8 0.1 0.2 -0.3 0.5 0.2 0.4 0.0 0.1 0.0 -0.2

10 Austrailia 0.5 0.5 0.1 0.3 0.6 0.3 0.5 -0.1 0.4 1.0 0.1 -0.1 -0.1 0.5 0.1 0.0 0.2 0.0 0.2 0.2 0.5 0.7 0.211 Argentina 0.3 0.0 0.3 0.0 0.1 0.1 0.1 0.4 0.5 0.1 1.0 0.8 0.7 0.4 0.3 0.6 0.4 0.0 0.5 0.5 0.5 0.1 0.112 India 0.0 -0.1 0.3 -0.1 -0.1 0.0 0.1 0.3 0.8 -0.1 0.8 1.0 0.8 0.1 0.1 0.4 0.3 -0.1 0.2 0.3 0.5 -0.1 0.013 Indonesia 0.0 0.0 0.1 0.0 0.1 0.1 0.4 0.5 0.8 -0.1 0.7 0.8 1.0 0.5 0.3 0.4 0.4 0.0 0.3 0.4 0.6 0.0 0.014 Mexico 0.7 0.8 0.3 0.8 0.7 0.7 0.9 0.5 0.1 0.5 0.4 0.1 0.5 1.0 0.5 0.4 0.6 0.3 0.5 0.4 0.7 0.8 0.815 Russia 0.1 0.3 0.3 0.5 0.5 0.4 0.5 0.7 0.2 0.1 0.3 0.1 0.3 0.5 1.0 0.2 0.7 0.6 0.4 0.8 0.6 0.6 0.516 Saudi Arabia -0.1 -0.1 -0.2 -0.1 0.0 0.0 0.2 0.2 -0.3 0.0 0.6 0.4 0.4 0.4 0.2 1.0 0.3 0.2 0.4 0.1 -0.1 0.1 -0.117 South Africa 0.2 0.4 0.6 0.6 0.4 0.4 0.7 0.7 0.5 0.2 0.4 0.3 0.4 0.6 0.7 0.3 1.0 0.6 0.6 0.8 0.6 0.6 0.618 South Korea 0.3 0.4 0.6 0.6 0.4 0.3 0.3 0.6 0.2 0.0 0.0 -0.1 0.0 0.3 0.6 0.2 0.6 1.0 0.3 0.6 0.2 0.4 0.219 Turkey 0.6 0.4 0.9 0.5 0.5 0.5 0.2 0.7 0.4 0.2 0.5 0.2 0.3 0.5 0.4 0.4 0.6 0.3 1.0 0.8 0.5 0.4 0.620 Hong Kong 0.3 0.1 0.3 0.5 0.5 0.2 0.3 0.7 0.0 0.2 0.5 0.3 0.4 0.4 0.8 0.1 0.8 0.6 0.8 1.0 0.2 0.5 0.121 Switzerland 0.5 0.5 0.4 0.6 0.7 0.6 0.4 0.3 0.1 0.5 0.5 0.5 0.6 0.7 0.6 -0.1 0.6 0.2 0.5 0.2 1.0 0.7 0.222 Spain 0.8 0.9 0.4 0.9 0.9 0.8 0.8 0.4 0.0 0.7 0.1 -0.1 0.0 0.8 0.6 0.1 0.6 0.4 0.4 0.5 0.7 1.0 1.023 Sweden 0.2 0.4 0.3 0.4 0.9 0.6 0.5 0.0 -0.2 0.2 0.1 0.0 0.0 0.8 0.5 -0.1 0.6 0.2 0.6 0.1 0.2 1.0 1.0

40 year correlation1 matrix of annual GDP growth (1970 – 2009)*:

Source: Bloomberg

1Correlation is a statistical measure of the degree to which the movements of two variables are randomly related. Correlation can range from -1.0 to 1.0 with 1.0 indicating a perfect positive correlation and -1.0 indicating a perfect negative correlation.Indices are not investment products and may not be considered for investment. Please refer to the back of this presentation for definitions of world indicesPast performance is no guarantee of future results.

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In recent years however, GDP growth across varying countries has grown and declined in similar fashion and is forecasted1 to continue to do the same

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2008 Actual 3.1% 0.8% 1.1% 0.7% 0.8% (0.7%) 6.0% 9.0% 5.1% 7.3% 5.6%2009 Forecasted (1.1%)(3.4%) (2.7%) (4.4%) (4.2%) (5.4%) 1.7% 8.5% (0.7%) 5.4% (7.5%)2010 Predicted 3.1% 1.3% 1.5% 0.9% 0.3% 1.7% 5.1% 9.0% 3.5% 6.4% 1.5%2014 Predicted 4.8% 2.6% 2.4% 2.8% 2.3% 2.5% 6.8% 10.0% 4.5% 8.0% 5.0%

GDP Growth Global Advanced US UK EUR Japan Emerging China Brazil India Russia

The IMF’s baseline forecast for global growth has been upwardly revised, with advanced economies expected to register positive growth in 2010, and emerging economies projected to rebound significantly.

• Prospects for global trade have improved

• Fears of widespread deflation have receded

Source: International Monetary Fund, OCED; Wall Street Journal. Data as of 12/31/2009

1Forecasted by the International Monetary FundPast performance is no guarantee of future results.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 151 DJIA Index 1.0 0.9 0.6 0.6 0.6 0.7 0.6 0.6 0.5 0.4 0.6 0.5 0.5 0.6 0.62 S&P 500 Index 0.9 1.0 0.6 0.6 0.7 0.7 0.6 0.6 0.6 0.5 0.6 0.5 0.5 0.5 0.53 Mexico Bolsa Index 0.6 0.6 1.0 0.6 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.3 0.4 0.64 Brazil Bovespa Stock Idx 0.6 0.6 0.6 1.0 0.6 0.5 0.5 0.6 0.6 0.6 0.5 0.6 0.5 0.6 0.55 Dj Euro Stoxx 50 0.6 0.7 0.5 0.6 1.0 0.7 0.9 0.9 0.8 0.8 0.8 0.8 0.7 0.5 0.56 Ftse 100 Index 0.7 0.7 0.5 0.5 0.7 1.0 0.6 0.6 0.7 0.6 0.7 0.5 0.5 0.5 0.67 Cac 40 Index 0.6 0.6 0.4 0.5 0.9 0.6 1.0 0.8 0.7 0.8 0.7 0.8 0.6 0.5 0.48 Dax Index 0.6 0.6 0.4 0.6 0.9 0.6 0.8 1.0 0.7 0.8 0.8 0.8 0.5 0.5 0.49 Ibex 35 Index 0.5 0.6 0.4 0.6 0.8 0.7 0.7 0.7 1.0 0.7 0.7 0.7 0.6 0.4 0.6

10 Aex-Index 0.4 0.5 0.4 0.6 0.8 0.6 0.8 0.8 0.7 1.0 0.7 0.7 0.6 0.4 0.311 Omx Stockholm 30 Index 0.6 0.6 0.4 0.5 0.8 0.7 0.7 0.8 0.7 0.7 1.0 0.7 0.6 0.4 0.412 Swiss Market Index 0.5 0.5 0.4 0.6 0.8 0.5 0.8 0.8 0.7 0.7 0.7 1.0 0.5 0.4 0.413 Nikkei 225 0.5 0.5 0.3 0.5 0.7 0.5 0.6 0.5 0.6 0.6 0.6 0.5 1.0 0.3 0.414 Hang Seng Index 0.6 0.5 0.4 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.3 1.0 0.415 S&P/Asx 200 Index 0.6 0.5 0.6 0.5 0.5 0.6 0.4 0.4 0.6 0.3 0.4 0.4 0.4 0.4 1.0

Growing correlations of global indices

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 161 DJIA Index 1.0 0.9 0.5 0.7 0.9 0.9 0.8 0.8 0.8 0.7 0.8 0.8 0.8 0.5 0.7 0.62 S&P 500 Index 0.9 1.0 0.7 0.7 0.9 0.9 0.9 0.8 0.8 0.7 0.8 0.8 0.8 0.5 0.7 0.63 Mexico Bolsa Index 0.5 0.7 1.0 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.6 0.74 Brazil Bovespa Stock Idx 0.7 0.7 0.6 1.0 0.6 0.6 0.6 0.6 0.7 0.5 0.6 0.6 0.5 0.4 0.7 0.65 Dj Euro Stoxx 50 0.9 0.9 0.6 0.6 1.0 0.9 1.0 1.0 0.8 0.9 1.0 0.9 0.8 0.4 0.6 0.66 Ftse 100 Index 0.9 0.9 0.6 0.6 0.9 1.0 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.4 0.6 0.67 Cac 40 Index 0.8 0.9 0.6 0.6 1.0 0.9 1.0 0.9 0.8 0.9 0.9 0.9 0.8 0.4 0.6 0.68 Dax Index 0.8 0.8 0.6 0.6 1.0 0.9 0.9 1.0 0.8 0.8 0.9 0.9 0.8 0.4 0.6 0.69 Ibex 35 Index 0.8 0.8 0.6 0.7 0.8 0.8 0.8 0.8 1.0 0.8 0.8 0.8 0.6 0.5 0.6 0.6

10 Ftse Mib Index 0.7 0.7 0.6 0.5 0.9 0.8 0.9 0.8 0.8 1.0 0.8 0.8 0.7 0.4 0.6 0.511 Aex-Index 0.8 0.8 0.6 0.6 1.0 0.8 0.9 0.9 0.8 0.8 1.0 0.8 0.8 0.4 0.6 0.712 Omx Stockholm 30 Index 0.8 0.8 0.5 0.6 0.9 0.8 0.9 0.9 0.8 0.8 0.8 1.0 0.7 0.4 0.7 0.613 Swiss Market Index 0.8 0.8 0.5 0.5 0.8 0.8 0.8 0.8 0.6 0.7 0.8 0.7 1.0 0.4 0.6 0.614 Nikkei 225 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.5 0.4 0.4 0.4 0.4 1.0 0.5 0.515 Hang Seng Index 0.7 0.7 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.7 0.6 0.5 1.0 0.516 S&P/Asx 200 Index 0.6 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.5 0.7 0.6 0.6 0.5 0.5 1.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 161 DJIA Index 1.0 1.0 0.8 0.7 0.9 0.8 0.8 0.9 0.8 0.8 0.8 0.7 0.8 0.6 0.7 0.82 S&P 500 Index 1.0 1.0 0.8 0.7 0.9 0.9 0.9 0.9 0.8 0.9 0.8 0.7 0.8 0.7 0.7 0.93 Mexico Bolsa Index 0.8 0.8 1.0 0.7 0.8 0.7 0.7 0.8 0.8 0.7 0.7 0.6 0.6 0.7 0.6 0.74 Brazil Bovespa Stock Idx 0.7 0.7 0.7 1.0 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.7 0.8 0.75 Dj Euro Stoxx 50 0.9 0.9 0.8 0.7 1.0 0.9 1.0 1.0 0.9 1.0 0.9 0.8 0.9 0.8 0.7 0.96 Ftse 100 Index 0.8 0.9 0.7 0.7 0.9 1.0 0.9 0.9 0.8 0.9 0.9 0.7 0.8 0.8 0.7 0.97 Cac 40 Index 0.8 0.9 0.7 0.7 1.0 0.9 1.0 1.0 0.9 0.9 0.9 0.8 0.9 0.8 0.7 0.98 Dax Index 0.9 0.9 0.8 0.7 1.0 0.9 1.0 1.0 0.9 0.9 0.8 0.8 0.8 0.8 0.7 0.99 Ibex 35 Index 0.8 0.8 0.8 0.7 0.9 0.8 0.9 0.9 1.0 0.8 0.8 0.8 0.8 0.7 0.7 0.8

10 Ftse Mib Index 0.8 0.9 0.7 0.7 1.0 0.9 0.9 0.9 0.8 1.0 0.9 0.7 0.8 0.7 0.7 0.811 Aex-Index 0.8 0.8 0.7 0.7 0.9 0.9 0.9 0.8 0.8 0.9 1.0 0.8 0.8 0.8 0.7 0.812 Omx Stockholm 30 Index 0.7 0.7 0.6 0.6 0.8 0.7 0.8 0.8 0.8 0.7 0.8 1.0 0.7 0.8 0.7 0.713 Swiss Market Index 0.8 0.8 0.6 0.6 0.9 0.8 0.9 0.8 0.8 0.8 0.8 0.7 1.0 0.7 0.6 0.814 Nikkei 225 0.6 0.7 0.7 0.7 0.8 0.8 0.8 0.8 0.7 0.7 0.8 0.8 0.7 1.0 0.7 0.815 Hang Seng Index 0.7 0.7 0.6 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.7 1.0 0.716 S&P/Asx 200 Index 0.8 0.9 0.7 0.7 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.7 0.8 0.8 0.7 1.0

5 year correlation1 matrix (Mar 2000 – Feb 2005):



• National economies have recently become more closely linked, not only because of growing international trade and investment flows, but also due to terms of international financial transactions.

• Influences contributing to an increased general level of correlation among markets and markets integration include the following:

– Development of global and multinational companies and organizations

– Advances in information technology

– Deregulation of the financial systems of the major industrialized countries

– Explosive growth in international capital flows

– Abolishment of foreign exchange controls

Past performance is no guarantee of future results.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

1Correlation is a statistical measure of the degree to which the movements of two variables are randomly related. Correlation can range from -1.0 to 1.0 with 1.0 indicating a perfect positive correlation and -1.0 indicating a perfect negative correlation.

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LIncreasing popularity of ETFs – adding to the problem?

• Exchange Traded Funds (ETFs) allow easier access into emerging markets and developing nations

• However, ETFs may be creating a higher correlation of their underlying securities as a byproduct of their increasing popularity

– Many investors prefer to hold a market basket, rather than individually analyze securities

– ETFs are sometimes marketed as “better alternatives” to mutual funds, because of the significantly lower cost basis

• ETFs should increase the correlation of a certain sector or basket of securities

– In a state of market deleveraging, or releveraging, they have the potential magnify the correlation effects of market swings

– May create more irrational market pricing of individual securities

– For a hedge fund manager who puts on short positions based on poor fundamentals of an individual company, if this company is in an ETF basket that is growing in popularity, it might trade up due to the ETF volume and the hedge fund manager may lose money

$0

$100

$200

$300

$400

$500

$600

$700

$800

2003 2004 2005 2006 2007 2008 2009-60%

-40%

-20%

0%

20%

40%

60%Assets ($Bn) Yearly % Increase

ETF Industry Asset Growth

$1,866

$1,556

$1,276

$1,023

$776

$0

$500

$1,000

$1,500

$2,000

2009 2010E 2011E 2012E 2013E

ETF Asset Projections 2009E – 2013E

Source: Cerulli Associates, 2009Source: SSgA Strategy & Research as of 12/31/2009

Assets

($

bn

)

% In

cre

ase

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LSo is this the end of equity diversification?

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• Even in a highly correlated1 market like 2009

CORRELATION ≠

RETURN

Lowest 2009 Return Highest 2009 Return

S&P 500 members

Marshall & Ilsley-60.0%

XL Capital Ltd395.4%

S&P 500 Level 1

Telecommunication+2.6%

Information Tech+59.9%

S&P 500 Level 2

Banks-8.9%

Auto & Comp+114.5%

S&P 500 Level 3

Construction Materials-24.3%

Real Estate Management Development

+214.0%

Russell 2000Financial Services

-3.9%Consumer Discretionary

+61.4%

G8Japan

+19.0%Russia

+121.1%

G20Japan

+19.0%Russia

+121.1%1Correlation is a statistical measure of the degree to which the movements of two variables are randomly related. Correlation can range from -1.0 to 1.0 with 1.0 indicating a perfect positive correlation and -1.0 indicating a perfect negative correlation.

Indices are not investment products and may not be considered for investment. Please refer to the back of this presentation for terms and definitionsPast performance is no guarantee of future results.

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LWe are witnessing a global effort in hedge fund regulation

• Multiple countries banned short selling

– Banned naked shorts: Austria, Belgium, Denmark, France, Germany, Italy, Japan, Netherlands, Portugal, Spain, and Switzerland

– Banned covered shorts: Australia, Canada, Ireland, Italy, Netherlands, Norway, S. Korea, Switzerland, UK, and USA

• Government bodies are requiring more of hedge funds

– We will likely see required registration by certain hedge fund advisers under the Investment Adviser Act of 1940

– The European Commission drafted a directive that forces transparency and limits risk taking by funds

– Hong Kong requires all hedge fund managers engaging in regulated activities to be licensed by the Hong Kong Securities and Futures Commission (SFC) in the same way as "traditional" fund managers

Recent Insider Trading Enforcement Trends:

• SEC increased focus on insider trading by hedge funds in last 3 years

– 2007: SEC formed “working group” designed to “combat hedge fund insider trading”

– 2008: SEC brought highest number of insider trading cases in its history, including several involving hedge funds

– 2009: SEC brought a series of increasingly high-profile “hedge fund” insider trading cases in close coordination with criminal authorities

• Foreign regulators have been following the SEC’s lead

– In April 2009, the head of the FSA identified prosecution of “insider dealing” as a major enforcement priority

– FSA recently secured first ever criminal insider dealing conviction in the UK• Credit Default Swap Regulation & Clearinghouses

– Regulators are looking to reduce systemic risk to the financial system while banks are hoping to increase liquidity, especially during times of market stress

– In the U.S., central clearing operations began in March 2009 , operated by InterContinental Exchange (ICE). A key competitor also interested in entering the CDS clearing sector is CME Group

– In Europe, CDS Index clearing was launched by ICE's European subsidiary ICE Clear Europe in July 2009. It launched Single Name clearing in Dec 2009

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LGlobal Hedge Fund Regulation: More oversight on the way

• The current administration is dissatisfied with the fact that hedge funds are not required to register with regulators and that the government lacked reliable, comprehensive data to monitor and access their risk

• There are currently multiple versions of regulatory reform proposals that may directly impact hedge fund regulation:

1. Wall Street Reform and Consumer Protection Act

2. The Private Fund Investment Advisors Act

3. The Hedge Fund Transparency Act

• SEC registration would impose regulation around:– Disclosure– Reporting– Recordkeeping– SEC audit– Internal controls– Compliance requirements of the

Investment Advisors Act

• The original April 2009 European Commission’s AIFM Directive proposal outlines regulatory controls on– Transparency/Disclosure– Treatment of investors– Authorization (manager would have to

prove competence)– Leverage (not quantified

• Critics complain the proposal will place a disproportionately high regulatory burden on hedge funds. – AIMA, the FSA1, and other players have

been very vocal about the Directive’s shortcomings. AIMA publicly described it as “ill considered” and “punitive”.

– Regardless, even a watered down version will bring new transparency and oversight

• Originally, the Directive was expected to come into force in 2010 but it is now looking more like 2012

• UCITS III Funds are rapidly gaining acceptance: Just one fifth of European hedge fund managers have launched or are in the process of launching a UCITS II fund, but another third of European players are contemplating such a launch1

USA Europe

1FinAlternatives

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Global investment opportunities: Hedge fund managers aim to generate alpha among divergent global growth trends

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• Asia ex-Japan growth continues to rebound, which should drive opportunities both long and short throughout the region

• BRIC (Brazil, India, China & Russia) – looking strong vs. developed markets

• Europe - A pick-up in corporate activity, balance sheet restructuring, and sovereign deficit/debt concerns may lead to M&A and credit/distressed opportunities

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90

100

110

120

130

140

150

160

170

180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

100

150

200

250

300

350

1 EMS = Electronics Manufacturing Services2 Source: Cisco, 20093 Source: J.P. Morgan Securities, Inc. Data as of 11/18/20094Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Asia continues to be one of the most dynamic regions in the world

Asia

• Asia continues to be one of the most dynamic regions in the world

– region’s relative banking system stability, ability to afford stimulus programs and higher expected profit growth are attractive

– many Asian countries are not burdened by the same financial and consumer leverage problems rampant in Western economies

– globally, Asian countries are experiencing the strongest rebounds in retail sales, industrial production, and employment

• Again, plenty of reasons to be “in” the market, just not “all in”

– Asia ex-Japan seems fairly valued at 15.1x forward P/E; in a trading environment long/short managers generate outperformance due to alpha from stock selection, rather than through market beta4

Asia ex-Japan growth continues to rebound, which should drive opportunities throughout the region3

EM Asia ex China (LHS)

China (RHS)

Developed Markets (LHS)

Global industrial production3

Index, Jan 2000 = 100

Asia

Worldwide EMS1 Manufacturing Square Footage by Region2

Europe15%

Latin Americ

a9%

Eastern Europe

4%

ROW1%

North America38%

Asia/Pacific34%

Europe 7%

Latin America 7%

Eastern Europe

3%

ROW1%

North Americ

a20%

Asia/ Pacific(a)

63%

2001 2008

Index, Jan 2000 = 100

Past performance is not indicative of future results. Indices are not investment products and may not be considered for investment.

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• China is quickly recovering from the worst global recession in 50 years courtesy of what might be the largest loan expansion in a modern economy on record

– China is now the world’s largest exporter, 2nd largest economy and stock market and the largest car market

• During Q4, Chinese GDP grew at an impressive 10.7% rate. However, growth continues to be driven by fixed capital formation and not consumption

5%

7%

9%

11%

13%

15%

1998 2000 2002 2004 2006 2008

China’s rapid GDP growth has been a story of capital formation

Source: J.P. Morgan Securities Inc. Data as of 12/31/2009.

Source: International Monetary Fund, Pivot Capital.

Real GDP growth

China’s GDP growth continues to rebound

10%

20%

30%

40%

50%

2002 2003 2004 2005 2006 2007 2008 2009 2010

10%

15%

20%

25%

30%

35%

Source: State Statistical Bureau, J.P. Morgan Securities, Inc. Data as of 1/31/2010.

YoY % change, dotted lines represents forecast

Heavy lifting being done by the public sector

15%

25%

35%

45%

55%

Japan ('60-'88) Germany ('54-'82)

S. Korea ('78-'06)

China ('81-'09E)

Trough Peak

Percent of GDP

Fixed capital investment: China’s primary driver of GDP growth

Bank loans (RHS)

Fixed asset investment (LHS)


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Brazil, Russia, India, and China (BRIC) – looking strong vs. developed markets

15

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014

BRIC Advanced Emerging

Real GDP growth (QoQ saar)

Public Debt as % of GDP

Brazil 57.4 58.3 66.9 69.6Russia 6.8 4.6 7.2 7.4India 42.3 42.6 45.0 45.7China 21.9 18.8 20.0 20.0EU 76.7 77.6 NA NAUS 52.1 60.6 NA NAUK 37.7 45.3 NA NAJapan 176.2 187.6 NA NA

2007 2008 2009F 2010F

16

20

24

28

32

36

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

EM US

EM Consumption overtook US consumption in 2008

0%

20%

40%

60%

80%

100%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

North America Developed Europe MSCI EM Japan ROW

Scale of Emerging Economies: Global nominal GDP (%)

North America: 33% to 23%

Developed Europe: 26% to 22%

Emerging Markets: 19% to 41%, BRIC increased from 8% to 27%)

Japan: 15% to 7%

Rest of World: 7% to 8%

.

Source: J.P. Morgan, IMF. Note: The projections assume nominal GDP growth at potential real GDP growth and central banks inflation target. To compute FX for periods beyond 2010, we assume the normalization of REER over the forecasted period.

Source: J.P. Morgan. Note: Chart shows EM and US consumption as percentage of global consumption.

Source: International Monetary Fund, World Economic Outlook Database 2009. Note: Yellow shaded area denotes forecasts till 2014. cc

Source: J.P. Morgan economics.


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• Recent worries about Greece’s mounting debt and large fiscal deficit has raised worries in Europe and around the world about the sustainability of government finances

– The European Union has responded to reassure the international community that they will safeguard the financial stability of the Euro area as a whole

• This development has further increased pressure on the Euro which provides some much needed relief in the near term

Source: J.P. Morgan Securities, Inc. Data as of 12/31/2009.

The strength of the European Union is being put to the test

Source: J.P. Morgan Securities, Inc., Spain National Statistics Institute. Data as of Q3 2009.

Unemployment rate Real GDP growth

-12-10-8

-6-4-202

468

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Spanish financial position as % of GDP, 4-q moving sums

European consumers and businesses are recovering at the expense of the government

Source: Bloomberg. Data as of 2/11/2010.

Unemployment rate Real GDP growth

1.25

1.30

1.35

1.40

1.45

1.50

1.55

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

EUR/USD

A weaker Euro should help boost Europe’s economy

Corporate

Government

Household

-12

-9

-6

-3

0

3

6

9

NO

R

ITA

DEU

SWE

PRT

FRA

ISL

GRE

ESP

GBR

IRL

Significant federal deficits are raising investor concerns2009 government balances, % of GDP


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– Sizable market – The European LBO market peaked

in 2007 with issuance of €140 billion in senior loan, versus approximately €4.65 billion in 2009

– Few competitors, less capital chasing after opportunities

– Many prop desks at banks and investment banks shut down

– Many U.S.-based funds have exited European market

– Many leveraged European credit funds have liquidated

– CLOs have limited ability to inject additional capital in distressed situations or restructurings

– Some private equity sponsors active in "repurchasing" portfolio companies through debt exchanges but lack true distressed experience

– Some private equity sponsors lack funds to compete

European distressed opportunity is attractive

Source: Standard and Poor’s Financial Services LLC

$0

$50

$100

$150

$200

$250

2001 2002 2003 2004 2005 2006 2007 2008 20090%

10%

20%

30%

40%

50%

60%High Yield BondsLeveraged Loans & MezzanineHigh Yield as % of Total New Issuance

Leveraged Loans and High Yield

Siz

e o

f M

ark

et

(U.S

. $

in

B

illion

s)

% p

erc

en

t

€0.0

€10.0

€20.0

€30.0

€40.0

€50.0

2004 2005 2006 2007 2008 2009

Restructurings

Defaults

Volume of Defaults and Restructurings (Face Value)

€ in

Billion

s

Note: Due to the minimal LBO activity in 2009, none of these deals have fallen into distressed territory.

Source: Standard & Poor’s LCD European Leveraged Loan Review, Fourth-quarter2009


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– Forced sellers – "Fallen angels" held by mutual funds– Structured credits held by insurance

companies and mutual funds– CLOs are typically rating sensitive– Non-performing and CCC-rated loans

held by CLOs– Credit opportunity funds forced to sell

as collateral falls below specific threshold

European distressed opportunity is attractive (continued)

European, U.S. and Global Speculative-Grade Default Rate Forecasts (Baseline Scenario)

– Rapidly evolving legal precedents– “Jurisdiction shopping" or changes in

center of commercial interests as companies move to creditor and/or debtor-friendly jurisdictions such as the U.K., Netherlands and Luxembourg

– Creditor-friendly jurisdictions are primary focus such as UK and Germany

Source: Moody’s


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LChallenges to investing globally – dynamic investment solutions needed

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Differing capital market rules

• Some markets open to local investors only

• Use of derivatives or ability to short limited

Risk of government intervention

• Imposition of tax on foreign investment

• Serious nationalization concerns

• Prohibition of controlling stakes in local companies

Less developed rule of law

• Investor rights less protected

• Opaque legal grievance process

• Corruption

Political Instability

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LDefinitions of terms

• An annualized return is an investment return, discounted retroactively from a cumulative figure, at which money, compounded annually, would reach the cumulative total

• Correlation is a statistical measure of the degree to which the movements of two variables are randomly related. Correlation can range from -1.0 to 1.0 with 1.0 indicating a perfect positive correlation and -1.0 indicating a perfect negative correlation

• Maximum drawdown is the maximum peak to trough decline during a specific record period of an investment or fund. It is usually quoted as the percentage between the peak to the trough

• Recovery period is the period of time required to reach the original peak from a trough formed by a drawdown

• Standard deviation measures the dispersion or uncertainty in a random variable (in this case, investment returns.) It measures the degree of variation (in this case) of monthly net returns around the average monthly net return. The higher the volatility of the investment returns, the higher will be the standard deviation. For this reason, standard deviation is often used as a measure of investment risk

• The Sharpe ratio is a return/risk measure, where the return (the numerator) is defined as the incremental average monthly return of an investment over the risk free rate. Risk (the denominator) is defined as the standard deviation of the monthly investment returns less the risk free rate. A risk free rate of 4% was used to calculate the Sharpe ratio. Values are presented in annualized terms; annualized Sharpe ratios are calculated by multiplying the monthly Sharpe ratio by the square root of twelve

• LIBOR (London Interbank Offered Rate) is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

• Leveraged loans are loans to non-investment grade companies. Purposes include: refinancing, leveraged buy-out, leveraged re-capitalization, corporate acquisition, stock buyback and working capital. M&A and refinancing usually the biggest categories, although recently LBOs picked up to around 1/3.

• ISDA® (International Swaps and Derivatives Association, Inc.), an association created by the private negotiated derivatives market that represents participating parties. This association helps to improve the private negotiated derivatives market by identifying and reducing risks in the market. Created in 1985, the ISDA has members from institutions around the world.

• OTC (Over the Counter) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

• SPV (special purpose vehicle) Legal entity created solely to serve a particular function, such as facilitation of a financial arrangement or creation of a financial instrument. See also special purpose corporation.

• IRR (Internal Rate of Return) is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as "economic rate of return (ERR)”

• Japanese Yen was established as the national currency of Japan in 1871 and is now one of the most widely held reserve currencies in the world.

• Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

• G8 is a forum, created by France in 1975, for governments of currently eight countries in the world: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States.

• G20: The Group of Twenty Finance Ministers and Central Bank Governors (known as the G-20 and also the G20 or Group of Twenty) is a group of finance ministers and central bank governors from 20 economies: 19 countries plus the European Union. The full list of member countries and organizations includes: Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, the United Kingdom, and the United States

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LDefinitions of indices

All index performance information has been obtained from third parties and should not be relied upon as being complete or accurate. Indices are shown for comparison purposes only. They are not investment products available for purchase. Indices are unmanaged and generally do not take into account fees or expenses or employ special investment techniques such as leveraging or short selling. Furthermore, while some hedge fund indices may provide useful indications of the general performance of the hedge fund industry or particular hedge fund strategies, all hedge fund indices are subject to selection, valuation, survivorship and entry biases, and lack transparency with respect to their proprietary computations.

• DJIA Index - The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

• S&P 500 Index - Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941- 43 base period.

• Russell 2000 Total Return Index - The Russell 2000 Total Return Index offers investors access to the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

• Mexico Bolsa Index - The Mexican Bolsa Index, or the IPC (Indice de Precios y Cotizaciones), is a capitalization-weighted index of the leading stocks traded on the Mexican Stock Exchange. The index was developed with a base level of .78 as of October 30, 1978.

• Brazil Bovespa Stock Index - The Bovespa Index is a total return index weighted by traded volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Bovespa Index has been divided 10 times by a factor of 10 since January 1, 1985, those dates are:12/02/85, 04/14/89, 05/28/91, 01/26/93, 02/10/94, 08/29/8801/12/90, 01/21/92, 08/27/93, 03/03/97. Shares in Index displayed in Millions.

• Dj Euro Stoxx 50 - The Dow Jones EURO STOXX 50 (Price) Index is a free-float market capitalization-weighted index of 50 European blue-chip stocks from those countries participating in the EMU. Each component's weight is capped at 10% of the index's total free float market capitalization. The index was developed with a base value of 1000 as of December 31, 1991.

• Ftse 100 Index - The FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The equities use an investibility weighting in the index calculation. The index was developed with a base level of 1000 as of January 3, 1984. * Please see UKEDA100 Index andFTPTP100 Index for the official FTSE 100 Index Dividend Yield and P/E Ratio.

• Cac 40 Index - The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The index was developed with a base level of 1,000 as of December 31, 1987. As of December 1, 2003 the index has become a free float weighted index.

• Dax Index - The German Stock Index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. The equities use free float shares in the index calculation. The DAX has a base value of 1,000 as of December 31, 1987. As of June 18, 1999 only XETRA equity prices are used to calculate all DAX indices

• Ibex 35 Index - The IBEX 35 is the official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous market. It is calculated, supervised and published by the Sociedad de Bolsas. The equities use free float shares in the index calculation. The index was created with a base level of 3000 as of December 29, 1989

• Ftse Mib Index - The Index will consist of the 40 most liquid and capitalised stocks listed on the Borsa Italiana. In the FTSE MIB Index foreign shares will be eligible for inclusion. Secondary lines will not be eligible for inclusion. The calculation and methodology will be unchanged from S&P MIB Index.

• Aex-Index - The AEX-Index is a free-float adjusted market capitalization weighted index of the leading Dutch stocks traded on the Amsterdam Exchange. The index was adjusted to the Dutch Guilder fixing rate. The old value as of 12/31/98 was 1186.38 and the new value at start of trading on 1/4/99 was 538.36, after conversion. HP and GP can be adjusted back to Dutch Guilders by typing NLG.

• Omx Stockholm 30 Index - The OMX Stockholm 30 Index is a capitalization-weighted index of the 30 stocks that have the largest volume of the trading on the Stockholm Stock Exchange. Theequities use free float shares in the index calculation. The index was developed with a base level of 125 as of September 30, 1986. ** Effective on April 27, 1998 there was a 4-1 split of the index value.

• Swiss Market Index - The Swiss Market Index is a capitalization-weighted index of the 20 largest and most liquid stocks of the SPI universe. It represents about 85% of the free- float market capitalization of the Swiss equity market. The SMI was developed with a base value of 1,500 as of June 30, 1988.

• Nikkei 225 - The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949, where the average price was ¥176.21 with a divisor of 225.

• Hang Seng Index - The Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. The components of the index are divided into four subindexes: Commerce and Industry, Finance, Utilities, andProperties. The index was developed with a base level of 100 as of July 31, 1964

• S&P/Asx 200 Index - The S&P/ASX 200 measures the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalization. Representative, liquid and tradable, it is widely considered Australia's preeminent benchmark index. The index is float-adjusted. The index was launched in April 2000.

• MICEX Index - The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value - 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange - the main Russian stock exchange.

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General/Loss of capital. An investment in alternative investment funds involves a high degree of risk. There can be no assurance that the alternative investment fund’s return objectives will be realized and investors in the alternative investment fund could lose up to the full amount of their invested capital. The alternative investment fund’s fees and expenses may offset the alternative investment fund’s trading profits.

Lack of information. The industry is largely unregistered and loosely regulated with little or no public market coverage. Investors are reliant on the manager for the availability, quality and quantity of information. Information regarding investment strategies and performance may not be readily available to investors.

Limited liquidity. Interests are not publicly listed or traded on an exchange or automated quotation system. There is not a secondary market for interests, and as a result, invested capital is less accessible than that of traditional asset classes. Also, withdrawals and transfers are generally restricted.

Dependence on Trading Manager. Performance is more dependent on manager-specific skills, rather than broad exposure to a particular market.

Event risk. Given their niche specialization, market dislocations can affect some strategies more adversely than others.

Speculation. Alternative investments often employ leverage, sometimes at significant levels, to enhance potential returns. Investment techniques may include the use of derivative instruments such as futures, options and short sales, which amplify the possibilities for both profits and losses and may add volatility to the alternative investment fund’s performance.

Potential conflicts of interest. The payment of a performance based fee to the Trading Manager may create an incentive for the Trading Manager to cause the alternative investment fund to make riskier or more speculative investments than it would in the absence of such incentive.

Valuation. Because of overall size or concentration in particular markets of positions held by the alternative investment fund or other reasons, the value at which its investments can be liquidated may differ, sometimes significantly, from the interim valuations arrived at by the alternative investment fund.

Leverage. The capital structures of many financial services companies typically include substantial leverage. In addition, investments may be consummated through the use of significant leverage. Leveraged capital structures and the use of leverage in financing investments increase the exposure of a company to adverse economic factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the company or its industry and make the company more sensitive to declines in revenues and to increases in expenses.

Currency risks and Non-United States investments. Investments may be denominated in non-U.S. currencies. Accordingly, changes in currency exchange rates, costs of conversion and exchange control regulations may adversely affect the dollar value of investments.

Financial services industry risk factors. Financial services institutions have asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, interest rates, inflation, currency values, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties, and the volatility of trading markets. Financial services institutions operate in a highly regulated environment and are subject to extensive legal and regulatory restrictions and limitations and to supervision, examination and enforcement by regulatory authorities. Failure to comply with any of these laws, rules or regulations, some of which are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including civil penalties, fines, suspension or expulsion, and termination of deposit insurance, which may have material adverse effects.

Risks associated with infrastructure investments generally. An infrastructure investment is subject to certain risks associated with the ownership of infrastructure and infrastructure-related assets in general, including: the burdens of ownership of infrastructure assets; local, national and international economic conditions; the supply and demand for services from and access to infrastructure; the financial condition of users and suppliers of infrastructure assets; changes in interest rates and the availability of funds which may render the purchase, sale or refinancing of infrastructure assets difficult or impracticable; changes in environmental laws and regulations, and planning laws and other governmental rules; environmental claims arising in respect of infrastructure assets acquired with undisclosed or unknown environmental problems or as to which inadequate reserves have been established; changes in the price of energy, raw materials and labor; changes in fiscal and monetary policies; negative developments in the economy that depress travel; uninsured casualties; force majeure acts, terrorist events, under-insured or uninsurable losses; sovereign and sub-sovereign risks; contract counterparty default risk.

Key risks of investing in alternatives

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IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

Each recipient of this presentation, and each agent thereof, may disclose to any person, without limitation, the U.S. income and franchise tax treatment and tax structure of the transactions described herein and may disclose all materials of any kind (including opinions or other tax analyses) provided to each recipient insofar as the materials relate to a U.S. income or franchise tax strategy provided to such recipient by JPMorgan Chase & Co. and its subsidiaries.

Bank products and services are offered by JPMorgan Chase Bank, N.A. and its affiliates. Securities products and services are offered by J.P. Morgan Securities Inc., member NYSE, FINRA and SIPC.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Securities Inc. or its brokerage affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer. The views and strategies described herein may not be suitable for all investors. The discussion of loans or other extensions of credit in this material is for illustrative purposes only. No commitment to lend by J.P. Morgan should be construed or implied. This material is distributed with the understanding that we are not rendering accounting, legal or tax advice. Estate planning requires legal assistance. You should consult with your independent advisors concerning such matters.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice. This material should not be regarded as research or a J.P. Morgan research report. Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan, including research. The investment strategies and views stated here may differ from those expressed for other purposes or in other contexts by other J.P. Morgan market strategists.

J.P. Morgan Securities Inc. may act as a market maker in markets relevant to structured products or option products and may engage in hedging or other operations in such markets relevant to its structured products or options exposures. Structured products and options are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other governmental agency.

In discussion of options and other strategies, results and risks are based solely on hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option-related products in general, as well as the products or strategies discussed herein are suitable to their needs. In actual transactions, the client’s counterparty for OTC derivatives applications is JPMorgan Chase Bank, N.A., London branch. For a copy of the “Characteristics and Risks of Standardized Options” booklet, please contact your J.P. Morgan Advisor.

Real estate, hedge funds, and other private investments may not be suitable for all individual investors, may present significant risks, and may be sold or redeemed at more or less than the original amount invested. Private investments are offered only by offering memoranda, which more fully describe the possible risks. There are no assurances that the stated investment objectives of any investment product will be met. Hedge funds (or funds of hedge funds): often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; can be highly illiquid; are not required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any hedge fund.

JPMorgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. Call JPMorgan Distribution Services at 1-800-480-4111 or visit www.jpmorganfunds.com for the prospectus. Investors should carefully consider the investment objectives, risks, charges and expenses of the mutual funds before investing. The prospectus contains this and other information about the mutual fund and should be read carefully before investing.

As applicable, portions of mutual fund performance information may be provided by Lipper, a Reuters company, subject to the following: © 2008 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.


Additional information is available upon request.

© 2010 JPMorgan Chase & Co.

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CONFIDENTIAL Hedge Funds: Globalization and its Consequences Please read important disclosures at the end of the presentation. Investment Products: - Not