This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory

This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory relationship. This presentation is not an advertisement and is not intended for public use or distribution beyond our private meeting. Bernstein does not provide tax, legal, or accounting

advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

What Every Tax Advisor Needs to Know

About Hedge Funds

Paul S. Lee, J.D., LL.M.National Managing Director

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Hedge Funds: Staggering Popularity and Growth

Over 9,000 Funds

Over $1.4 Trillion

Source: HFR Industry Report , Fourth Quarter, 2006

Number of Hedge Funds

610

3,873

9,4628,664

2,383

1990 1995 2000 2005 2006

Assets ($ in Millions)

$39,000$186,000

$1,110,000

$1,430,000

$491,000

1990 1995 2000 2005 2006

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What Do You Need to Know as an Advisor?

Fund Strategies & Categories

Financial Instruments

U.S. FundsNon-U.S. Funds

Fund Structure

Tax Classification

Subchapter K

Valuation Issues

Taxation of Investments

Investor Level Issues

U.S. Trade or Business

FDAP

PFIC

UBTI

CRTs

pgs.39-44

Choosing a Fund

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Hedge Fund: No Standard Legal Definition

Lightly regulated investment vehicle

Not registered under the Investment Company Act of 1940

Securities not registered with SEC

Limited to high net worth individuals and institutions

Limited liquidity

Flexible investment mandate

Not just “long,” but also “short”

Employ “leverage”

Two layers of fees

Investment management fee (1% to 3%)

Incentive fee based on profits (10% to 30%)

With a “watermark”

Above “benchmark”

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“Categories” of Hedge Fund Strategies

Directional Strategies (~2/3) Long-Short Equity Strategies Global Asset Allocators (Macro) Emerging Markets

Event Driven

Merger Arbitrage

Distressed

Market Neutral

FI Arbitrage

Conv. Arbitrage

Long/Short

Emerging

Macro

“Market Neutral” (~1/3) Event Driven

Merger Arbitrage Distressed Securities

Equity Market Neutral Arbitrage Strategies

Fixed Income Arbitrage

Convertible Arbitrage

Source: HFR Industry Report 2006.

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Going “Long” and “Short”

Financial tools and strategies

Short sales

Futures and forwards

Options

Notional principal contracts (pg. 5, fn. 4)

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Mechanics of a Short Sale

Owner(Lender)

Short Seller(Borrower)

(Hedge Fund)

Loan100 shares XYZ

Borrow Fee+

In Lieu Dividends

“Short Sale”100 shares XYZ @ $10 per share

Proceeds ($1,000)+

Interest

Market

Return100 shares of XYZ

MarketShort Seller(Borrower)

(Hedge Fund)

“Closing” Purchase100 shares XYZ

Owner(Lender)

Closing Transaction

@$5 per share$500 ProfitShort Seller

@$15 per share($500) LossShort Seller

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Mechanics of a Futures/Forward Contract

Purchaser(Long Position)

Seller(Short Position)

Contract to Buy/Sell(No Premium or Up-Front Payment)

Loss toShort Position

Profit toShort Position

Marketvs.

Futures Price

Future Date+

Futures Price

Obligation:Sell + Deliver

Obligation:Buy

Gain toLong Position

Loss toLong Position

“Cash-Settled”Futures Contracts

andMark to Market System

CommoditiesCurrenciesSecurities

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Options

CALL PUT

Holder (Buyer)

Writer (Seller)

Holder (Buyer)

Writer (Seller)

Right or Obligation

Right (Buy)

Obligation (Sell)

Right (Sell)

Obligation (Buy)

Outlook on Security

Maximum Gain

Unlimited Premium Strike price minus

premium

Premium

Maximum Loss

Premium Unlimited unless

“covered”

Premium Strike price minus

premium

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Structure of “Onshore” Hedge Funds

Hedge Fund Investments

Limited Partners (Investors)

Hedge Fund L.P. or LLC

General Partner

InvestmentManager

Levels of Inquiry

1) Tax classification of fund

2) Subchapter K implications

3) Valuation Issues

4) Taxation of investments

5) Investor-level issues

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Tax Classification of Fund

Onshore hedge funds are partnerships

“Publicly traded partnership” exceptions (pg. 7)

Hedge fund status

Limited Partner (Investor)

Hedge Fund L.P.


Trader or Investor

vs.

Dealer

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Subchapter K: Allocation of Profit and Loss

Limited Partners (Investors)

Hedge Fund L.P.

General Partner

General Allocations

Net capital appreciation

(depreciation) to capital accounts

Tax items allocated under

§ 704(b) and § 704(c)based on net capital

Special Allocation

Incentive Fee

Based on benchmark?

Index: -9Return: -1

Incentive Fee: 20% of +8%


All section (§) references are to the Internal Revenue Code of 1986, as amended, unless otherwise noted.

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Subchapter K: Contribution of Assets In-Kind


Hedge Fund L.P.

Special Allocations

Differences inbook value& tax basis


Assets-in-kind

Non-taxable event

Unless hedge fund is“Investment Company”§§ 721(b) and 351(e)

Exception for

“Diversified portfolio”

“Insignificant amount”


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Subchapter K: Disguised Sale Rules


Hedge Fund L.P.

Triggering Events

Partial redemption or withdrawal

Tax Distributions?

Distributions with corresponding

allocation?


Presumed Disguised Sale

§ 707(a)(2)(B)

Contribution of appreciated property

Distribution of other property or cash to contributing partner

Within 2 years


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Subchapter K: “Mixing Bowl” Transactions

Contributing Partner

Hedge Fund L.P.

Capital accounts unaffected

Outside basis of contributing partner and

inside basisof property automatically

adjusted (no § 754 election)


Recognition of Gain/Loss

Contributed property

Distributed to any other partner

orReceive other property

Within 7 years

Other Partner

Character of gain/lossdetermined at fund level


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Valuation Issues

Donor/Decedent (Investor)

Hedge Fund L.P.

Hedge Fund Investments Valuation of theInvestments

Valuation forWealth TransferTax Purposes

Restrictions

•Transferability•Withdrawal•No Chapter 14

•Date of Transfer•Value Received (Future)•Previous Valuation

•Accounting/Valuation Periods•Actively traded•Hard to value assets

§ 754

Withdraw

Cure Book/TaxLose “Watermark”

Book/TaxDisparity

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Taxation of Investments: The Rules . . . And Exceptions

Limited Partner

Hedge Fund L.P.


Contracts under § 1256

Currency Transactions (§ 988) [pgs. 15-16]

Conversion Transactions (§ 1258) [pgs. 25-26]

Constructive Ownership (§ 1260) [pg. 35-37]

CAPITAL GAIN/LOSS

CLOSE OF TRANSACTION

Contracts under § 1256

Constructive Sales (§ 1259)

Straddle Rules (§ 1092)

X

X


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Taxation of Short Sales (Borrower’s Standpoint)

Gain or loss is on the closing transaction

Short-sale proceeds less basis in replacement stock

Short-term

Unless replacement stock has a long-term holding period

Special rule for converting short- to long-term gain

Special rule for converting long- to short-term loss

Section 1259 Constructive Sale

Appreciated financial position (contributed or acquired)

Deemed to have been sold upon the short sale


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Taxation of Futures and Forward Contracts

Realization events

Sale or exchange of the contract

Physical settlement at maturity

Offsetting contract

Cash settlement at maturity

Capital gain or loss

Short term

Options are essentially the same (pgs. 21 - 25)

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Section 1256 Contracts: Mark to Market Taxation

Includes:

Regulated Futures Contracts

Traded on an established exchange

Foreign Currency Contracts

Forward contracts traded in interbank market

Nonequity Options

Traded on an exchange

Broad-based equity index options (not narrow)

Options on commodities, currencies and financial instruments

Annual mark to market realization

Tax treatment

60% long-term capital gain/loss

40% short-term capital gain/lossAll section (§) references are to the Internal Revenue Code of 1986, as amended, unless otherwise noted.

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Straddle Rules (Section 1092)

Defer loss realized from disposition of a straddle position

Straddle

Positions that are valued on an established market,

That can be sold, exchanged or otherwise liquidated, and

The value change in one position will result in an inverse change in value in the offsetting position.

Included

Short sales while holding a long position in the stock

Any short position in “substantially similar” property


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Summary of Investor Level issues

Straddle rules apply to investors’ outside holdings (pg. 28)

Deductibility of Interest and Short Sale Expenses (pgs. 30 - 31)

Deductibility of Hedge Fund Investment Expenses (pgs. 31 - 32)

Passive Activity Rules (pg. 33)

At-Risk Limitations (pgs. 33 - 34)

Tax Shelter Reporting Requirements (pgs. 37 - 38)

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The Hedge Fund Claim

Produce equity-like returns

Maintain lower volatility

Exploit low correlation to rest of portfolio

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Hedging Market Exposures Tends to Lower Volatility

3.6% 4.0%

9.0%

16.0%

Market-NeutralHedge Funds

Bonds DirectionalHedge Funds

Stocks

*We group Convertible Arbitrage, Event-Driven, Equity Market-Neutral, and Fixed-Income Arbitrage hedge funds (as defined by the TASS database) into our index of Market-Neutral Hedge Funds. We group Long/Short Equity, Emerging Markets, CTAs, and Global Macro hedge funds (as defined by the TASS Database) into our index of Directional Hedge Funds. See “TASS Database” in the Appendix for a description of these indexes. Bonds are represented by the Lehman Brothers U.S. Aggregate Index, stocks by the S&P 500. Source: Lehman Brothers, Standard & Poor’s, TASS, and Bernstein

Market-Neutral* Fully hedge market exposure

Examples: Arbitrage; Event-Driven

Retain some market exposure

Examples: Long/Short Equity; Global Macro

Directional Strategies*

Annualized Volatility: 1996–2005

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Hedge Funds Don’t Move in Tandem with the Markets

Correlations to S&P 500*1996–2005

Low Correlation

High Correlation

Market-Neutral Hedge Funds

US Growth Stocks

International StocksUS Value Stocks

Directional Hedge Funds

Bonds

Real Estate

*Correlation between the S&P 500 and other investment alternatives, which are represented by the following—US Growth Stocks: Russell 1000 Growth Index; US Value Stocks: Russell 1000 Value Index; International Stocks: Morgan Stanley Capital International (MSCI) All Country World Index–Ex-USA; REITs: National Association of Real Estate Investment Trusts (NAREIT) Index; Hedge Funds: TASS and Bernstein; Bonds: Lehman Brothers U.S. Aggregate Index. Past correlations are not necessarily indicative of future results.

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Analysis of Hedge Fund Database

Directional Funds

*“Backfill bias” is the tendency of reported database returns to be higher as a result of hedge funds beginning to report returns after they have achieved strong performance and then retroactively filling in their history. To adjust for this, fund returns were included only if they appeared after the date that the fund first reported to the database. “Survivorship bias” is the tendency of reported database returns to be higher as a result of capturing only the returns of funds that continue to report to the database. To adjust for this, returns of funds that dropped out of the database were added back. All funds with less than $10 million in assets under management were removed from the sample. Given the data in the TASS database, the impact of “look-ahead bias” (unreported returns of funds leaving the database) cannot be determined. See “TASS Database” in the Appendix. Source: TASS and Bernstein

Market-Neutral Funds

Full history of funds currently reporting

Remove returns that were “backfilled” (Backfill Bias)*

Include returns of funds no longer reporting (Survivorship Bias)*

Adjusted Hedge Fund Returns

16.6%

(2.2)

(5.0)

9.4%

12.4%

(1.2)

(3.1)

8.1%

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Hedge Funds: Superior Trade-Offs

1996–2005 Annualized*

0

2

4

6

8

10

0 5 10 15 20

Volatility (%)

Directional Hedge Funds

Stocks

Bonds

T-Bills


*Past performance does not guarantee future results. Stocks are represented by the S&P 500, bonds by the Lehman Brothers U.S. Aggregate Index; maturity of Treasury bills is three months. See “TASS Database” in the Appendix for details on our hedge fund indexes. Hedge fund performance is given after fees (1% on asset management and 20% of profits, with a highwater mark). Source: Federal Reserve, Lehman Brothers, Standard & Poor’s, TASS, and Bernstein

Return (%)

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Traditional Allocation Models: A New Paradigm?

Percentage of Total Assets

Traditional Assets Only

60% Stocks

40% Bonds

With Hedge Funds

100% Hedge Funds?

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83%

Avg. ActivelyManaged Long

Portfolio

Market vs. Manager: The Traditional Approach

Sources of Returns: 1996–2005*

Manager Decisions (Alpha)

Market Movements

17%Objectives

■ Capture market return

■ Add a premium (alpha) through long-only security selection

*We measured the variation in monthly returns attributable to the Russell 3000 Index for each fund in our sample universes. We then took the average result to represent the market return driver. Though funds may have had exposures to other market factors, we attributed all returns not explained by the Russell 3000 movements to active manager decisions. See “Mercer Database” in the Appendix for details.Source: Mercer, Russell Investment Group, and Bernstein

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Hedge Funds Focus on Alpha, Not the Market

83%

20%

80%

17%

Avg. ActivelyManaged Long

Portfolio

Typical Hedge Fund

*We measured the variation in monthly returns attributable to the Russell 3000 Index for each fund in our sample universes and took the average result to represent the market return driver. Though funds may have had exposures to other market factors, we attributed all returns not explained by the Russell 3000 movements to active manager decisions. See “TASS Database” in the Appendix for details on how we analyzed hedge fund returns and “Mercer Database” for a description of how we analyzed traditionally managed stock returns.Source: Mercer, Russell Investment Group, TASS, and Bernstein

Sources of Returns: 1996–2005*

Manager Decisions (Alpha)

Market Movements

Sources of Alpha

● Long security selection

● Short-selling

● Various markets and instruments

● Leverage

● Specialized strategies(arbitrage, etc.)

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Alpha Dispersion Among Hedge Funds Is Wide…

12.4%

7.6%

(15.0)%

(8.3)%

Alpha +/- Median Manager: 1996–2005 Annualized*

Top-Decile Manager

Bottom- Decile

Manager


DirectionalHedge Funds

*“Alpha” is defined as a fund’s total return, minus the cash return and minus the fund’s estimated sensitivity to Russell 3000 Index returns (in excess of the rate on cash). See the Appendix for details on how we used and adjusted the TASS database of hedge funds and the Mercer database of traditionally managed portfolios. Source: Federal Reserve, Mercer, Russell Investment Group, TASS, and Bernstein

Median

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…But Much Narrower for Traditional Managers

12.4%

7.6%

(15.0)%

(8.3)%

Alpha +/- Median Manager: 1996–2005 Annualized*

Top-Decile Manager

Bottom- Decile

Manager


DirectionalHedge Funds

*“Alpha” is defined as a fund’s total return, minus the cash return and minus the fund’s estimated sensitivity to Russell 3000 Index returns (in excess of the rate on cash). See the Appendix for details on how we used and adjusted the TASS database of hedge funds and the Mercer database of traditionally managed portfolios. Source: Federal Reserve, Mercer, Russell Investment Group, TASS, and Bernstein

Long-Only Stocks

Long-Only Bonds

1.3% 0.4%

(1.2)% (0.4)%Median

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Low Volatility Masks Full Downside Risk

Worst Peak-to-Trough Loss*1996–2005

*Bonds are represented by the Lehman Brothers U.S. Aggregate Index. See “TASS Database” in the Appendix for details on our Market-Neutral Hedge Fund Index. Source: Lehman Brothers, TASS, and Bernstein

(9.8)%

(3.6)%

BondsMarket-NeutralHedge Funds

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More Like Stocks at Just the Wrong Times

Correlations to S&P 500*1996–2005

0.1

0.5

(0.4)

0.1

Up S&P Months Down S&P Months

BondsMarket-NeutralHedge Funds

*See “TASS Database” in the Appendix for details on our Market-Neutral Hedge Fund Index. Bonds are represented by the Lehman Brothers U.S. Aggregate Index. Past correlations are not necessarily indicative of future results. Source: Lehman Brothers, Standard & Poor’s, TASS, and Bernstein

Bonds

Market-NeutralHedge Funds

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Choosing the Right Hedge Fund Manager

Core competence History of positive alpha Experienced management team

Superior Performance After Fees and Taxes

Competitive Advantage

Diversified sources of return Market/economic exposure quantified Prudent use of leverage

Risk Management

Efficient trading and operations Legal compliance/independent accounting Detailed reporting

Infrastructure and Oversight

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AppendixTASS DatabaseThe TASS database includes the net-of-fee performance of individual hedge funds whose managers have elected to report to the database. As of December 2005, there were a total of more than 6,000 funds included in the database. In constructing our Market-Neutral Hedge Fund, Directional Hedge Fund, Hedge Fund, and Fund of Fund indexes, we included the performance of funds only after their managers decided to report to the database, and only for those funds that had at least $10 million in AUM. We also included the performance of all funds in the database that are no longer currently reporting. The indexes are equal-weighted. We calculated after-tax returns using ordinary-income and capital-gains tax rates at the highest marginal brackets in effect each month over the 1995-2005 period. In the case of directional hedge funds, we assumed that 75% of the return was characterized as ordinary income and 25% as long-term capital gain; for market-neutral funds, we assumed 90% ordinary income and 10% capital gain. In the calculations for funds of funds, we assumed a weighted average of the two fund categories.

Mercer Database of Equity and Fixed Income Managers In analyzing traditional active long-only equity manager and fixed income manager returns, we used the Mercer database of large-cap equity and fixed income managers. The database includes the net-of-fee performance of individual managers. As of December 2005, more than 1,400 funds were included in the large-cap equity manager database and more than 500 funds in the fixed income database. In both cases, we included the performance of all funds in the database that were no longer currently reporting.

Hedge Fund Allocation RecommendationsThe recommendations regarding the allocations to hedge funds are based on an analysis and consideration of the financial circumstances and risk profile of one specific client. The allocations to hedge funds in total recognize that there is unusual uncertainty regarding the ability of any hedge fund to achieve its premium goals, and therefore long-term risk is higher than it might appear. This leads us to limit the client’s overall hedge fund exposure in a way that varies with the risk profile of the client. These recommendations are intended to provide general guidance only and may not be suitable for all clients with that type of stock and bond allocation. The characteristics of hedge funds vary widely and may contain aggressive investment strategies designed for investors who understand and are willing to accept the risks associated with investing in funds that may utilize various investment strategies to enhance returns, including the use of leverage, investment in futures and options, and the technique of short-selling securities. There are substantial risks associated with investment in hedge funds, including the loss of all capital invested. Sales of hedge funds are restricted to investors who meet certain qualification standards.

This presentation is neither an offer to sell nor a solicitation of an offer to buy shares or interests in any AllianceBernstein hedge fund. The offering of any AllianceBernstein hedge fund is made only pursuant to the fund’s Confidential Memorandum, Subscription Agreement, and if available, current financial statements, all of which must be read in their entirety. No offer to purchase shares or interests will be accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation.

Documents

This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory