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DEMOGRAPHIC SHIFT WILL CHANGE LIFESTYLES ARE YOU PICTURING THE POSSIBILITIES Discover our approach at juliusbaer com visionary thinking For a personal meeting please contact our representative office at 46 Rothschild Boulevard in Tel Aviv 972 3 60 39 111 Julius Baer is the leading Swiss private banking group and present in some 50 locations worldwide From Dubai Frankfurt Geneva Guernsey Hong Kong London Lugano Monaco Montevideo Moscow Mumbai Nassau Singapore Tel Aviv to Zurich head office The Tel Aviv Representative Office of Bank Julius Baer Co Ltd is supervised by the Swiss regulator and is not subject to the supervision of the Supervisor of Banks in the Bank of Israel

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2005 ZOPA 3 2006 Prosper Marketplace P2P PEER TO PEER P2P Lending Club Peer To Peer P2P P2P P2P 2025 10 5 P2P Lending Club P2P 17

we expect going forward As in many industries the largest Hedge Funds dominate and 10 of the managers control 90 of the AuM worldwide Since 2009 the largest players have grown even bigger Consequently performance suffered and investors patience seems to have reached its limit Half of the 50 billion redemptions were in funds with more than 5 billion in AuM As noted above many legendary managers have decided to quit At the other end of the spectrum 50 of the managers have less than 100 million in AuM A challenging investing environment paired with an increased regulatory burden is shortening most of these funds life spans Many prefer to call it a day Thus while it is indeed likely that the industry will see less managers going forward the overall industry AuM could continue to grow Current average Hedge Fund allocations are typically between 0 and 10 which is still much lower than pre crisis In addition given the low expectations for other asset classes Hedge Funds have plenty of room to grow just like they did back in 2002 after the equity market collapse Manager Life Cycles Going Going Gone Hedge Fund managers like many companies have their own life cycle From start ups with young and hungry entrepreneurs those with the best returns emerge to become confirmed managers The latter manage enough AuM to make a decent living and yet are not so big as to make the portfolio or the team unmanageable In short it s the sweet spot The best ones and perhaps the greediest morph further into the large stage Unfortunately returns usually become anemic at this point many of their trades are crowded and the danger of illiquidity looms but the offices are fantastic so is the marketing team and for the best of them the owners take home billion dollar paychecks every year Many of these funds thought they could maximize performance and assets at the same time For many this large stage is also their last Going going gone While this manager life cycle has been known to Hedge Fund allocators for a long time what has changed since the crisis is the speed of that cycle Said differently a fund life span has shortened significantly and is closer to 5 7 years than the previous 10 years The markets are so volatile since the crisis that many funds with good and consistent returns over a 3 year window will see their AuM explode once they reach the magical billion dollar mark The only exceptions are those managers with the self discipline to close their funds to new investments This AuM growth will at best dilute returns and at worst kill the fund Deploying such large amounts in such short periods of time is extremely difficult either because of liquidity or simply because of the enormous work needed to find new opportunities Thus successful Hedge Fund investing going forward requires higher monitoring and turnover than we typically had pre crisis Towards a Better Industry The industry is indeed changing for the better Yes alpha has eroded but it is still there and the best investment talents still have great incentives to join Hedge Funds Yes the rise of quants has impacted several hedge fund strategies and managers need to adapt to it However strategies with less data available will thrive Yes there will probably be fewer managers in the next decade however this is not necessarily a bad thing and those who remain will operate closer to the sweet spot stage a good thing Yes the manager life span is shorter but this only means that portfolio turnover must be higher not that Hedge Fund investing is pointless And perhaps most important the opportunity set ahead of us seems exceptional Simply put Hedge Fund performance has been impacted by almost two years of risk reduction in the multi PM Hedge Fund platforms That flow has now reversed and platforms are aggressively building risk again Typically Hedge Funds do well during such periods and these cycles usually last several years As Mark Twain once quipped rumors of my death are greatly exaggerated The same applies to the comments of many of the Hedge Fund industry critics we all know what happened to the industry after Carol Loomis 1970 article 18

Cedric Kohler Hard Times Come to Hedge Funds Again In 1970 a Carol Loomis article in Fortune was titled as such and was predicting the end of Hedge Funds Almost 50 years later many think this title could not be more appropriate given today s environment Recent press articles are again predicting the end of the Hedge Fund industry with reasons including geriatric returns over the last two years 2016 seeing the largest outflows since 2009 or potentially one of the most devastating years on record in terms of fund closures What is more troubling however is that Hedge Fund industry leaders are also starting to voice doubts about the industry s future Andrew Fischer from Basso was quoted saying it s miserable miserable If this is the new normal I have no business Dan Loeb from Third Point called the industry performance catastrophic and in the first inning of a washout Other high profile funds such as Perry Chesapeake and Bluecrest have simply closed shop Many well known managers are in serious drawdowns while a small number are wrestling with lawsuits for bribery charges securities fraud or simply insider trading Is the industry at the beginning of its decline or is it on the contrary consolidating to become stronger An overview of a few key trends helps us answer this 3 trillion dollar question Performance Erosion Whether in absolute terms or in alpha terms the industry s current performance is far below its best years While investors have been used to 8 to 10 of alpha in the past they have had to adjust to 4 to 5 in recent years Of course markets have become more efficient over time and as David Harding from Winton says alpha is what you get paid for making markets efficient Additionally too many smart guys since 1996 Hedge Fund Research recorded a net increase of 7 565 funds chasing the same opportunities has contributed to this decline The combination of a low growth environment and zero interest rate levels has also made the market very narrow think FANG and fewer arbitrage opportunities Further managers information edge has also declined with much easier access to information As a result it is clearly harder to find alpha and when you 19 find it it s much lower but there is still some Note that 5 of alpha per year for a decade still yields a 40 cumulative return and typically this return comes with a much lower volatility than equity indices The Rise of the Quants With more than 1Trn in Assets under Management AuM across Quantitatively managed Hedge Funds Mutual Funds and Smart Beta products these strategies have drastically changed the investment landscape Note that this is 5 of the overall asset management industry double what it was in 2012 Over the last few years the amount of data creation has literally exploded reaching 2 5 quintillion bytes every day The combination of this data with quantitative tools has enabled the proliferation of factor investing and the birth of the quantamental strategy A traditional stock picker who ignores his exposure to factors such as momentum is a sure candidate for bottom quartile returns Conversely quants can now model a company s earnings stream alone get customers online activity data and all of this without meeting any CEOs or CFOs and calculated much faster than any fundamental analyst could Quantopian www quantopian com is an investment community of over 90 000 quants spread over 180 countries who come to the platform to test their trading strategies The best are selected and put into a real portfolio Steve Cohen an old school icon and SAC founder has just committed 250 million to this new platform As a result inefficiencies disappear quickly and the time horizon for traditional Hedge Fund manager has been compressed significantly However strategies which do not rely on historical data have not been impacted as much For instance distressed investing where managers take a company through a restructuring process in the courts will be harder for quants to handle you actually have to go to the court AuM Less is More With 3Trn in AuM and about 8 500 funds the Hedge Fund industry is at its all time high However as of October 2016 50 billion of outflows have been recorded year to date the largest amount since 2009 530 funds have already closed this year on pace to be the record year for hedge fund closures What can

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