Omgeo North American Advisory Board 20 Jan 2010

3. Genesis of Our Opinions In-depth knowledge of the investment management business with 30+ years of experience Stone House / The Glass Hammer survey conducted September / October 2009 94 respondents 75 firms $7 trillion AUM Current Investit Intelligence research project on transparency Current client projects Meetings and discussions with managers and their service providers © 2010 Stone House Consulting, LLC 3

4. What Is Coming? Convergence Emphasis on due diligence Continued focus on transparency Regulation Significant operational and reporting changes New challenges and approaches human capital M&A activity Emphasis on management of firms rather than just performance © 2010 Stone House Consulting, LLC 4

5. What Is Driving Change? Need to make up losses quickly Unwillingness to pay premium fees for mediocre or poor returns Rich talent pool seeking new opportunities New focus on the bottom line Recognition that alternative investments are not an asset class Unreasonable expectations Pent-up ideas Opportunity – and lots of it © 2010 Stone House Consulting, LLC 5

6. Convergence Hedge funds will increasingly begin to look like traditional investment managers High likelihood of oversight and registration Greater transparency and reporting demands Increased scrutiny of operational infrastructure and risk Adoption of separate accounts Increased emphasis on compliance Introduction of long-only strategies Lower fees Traditional investment managers will continue to adopt some hedge fund practices Launching hedge fund products and strategies Acquiring hedge fund managers Introducing performance-based fee structures Each will examine the other’s business and operating model © 2010 Stone House Consulting, LLC 6

8. Emphasis on Due Diligence Investor / client due diligence of funds and managers Hedge funds are seeing it already Traditional investment managers will undergo operational due diligence reviews more often Manager due diligence of counterparties Manager due diligence of service providers Custodians Prime brokers Fund administrators Software providers Evaluation of independence Small providers may be viewed as lacking independence from their largest clients Segregation of services may be required © 2010 Stone House Consulting, LLC 8

21. Significant Operational and Reporting Changes Enterprise-wide data needs have increased Investment risk management Operational risk management Reporting Reporting requirements have increased Content Timeliness Transparency Adoption of separate accounts by hedge fund managers Shadow accounting requirement for hedge funds © 2010 Stone House Consulting, LLC 19

25. New Challenges and Approaches with Human Capital Hedge funds will look to hire more staff from traditional investment management firms Significant staff turnover coming in some organizations Many firms did not treat their staff well during the downturn New criteria for firm leadership Portfolio management will no longer be the primary career track for future CEOs Performance measurement Risk management Operations and IT © 2010 Stone House Consulting, LLC 23

29. Survey Question: What Are Firms Doing to Attract and Retain Staff? “Not much from what I can see.” “These days it appears to be a buyer’s market.” “Not a lot right now…it almost seems to be ‘be happy you have a job.’” “For 80% of the firm – nothing worthwhile and generally are turn-styles for cheap help. The smart cheap help educates themselves for 12 months and then moves on usually to another firm for much better wages and treatment.” “I don’t think this is likely the focus at most firms right now. The assumption, it seems to me, is that there is no place to go, so firms aren’t too worried about retention. In addition, there is a lot of available talent from firms that have gone under, or sell-side firms that have laid people off or buy-side firms that have downsized.” © 2010 Stone House Consulting, LLC 27

30. Survey Question: What Are Firms Doing to Attract and Retain Staff? “The issue of talent acquisition, management and retention will develop into the key strategic issue facing companies over the next few years. A recent survey of HR Professionals reports that 73% of respondents indicated that most senior management that they principally work with perceives the HR function as helpful, positive, pro-active and a strategic function. Fully 65% ranked ‘identifying and recruiting top quality talent as important to the future of the company and a talent acquisition process that was thorough, consultative, and always produces expected results’ as one of the top two of importance. 65% of respondents also indicated that to attract, hire, motivate and retain quality employees, and make sure they are successful over the long-term, that they (management and HR) understand and accept what is required to help employees succeed in terms of competitive compensation, continued professional training and development, and that they are willing to make that investment. Yet 62% of the same respondents felt that their company does not have an effective talent management process. Further, 44% of respondents felt that their company’s talent acquisition process was ad hoc, informal and often unsuccessful. Lastly, fully 92% of all survey respondents indicated that identifying and recruiting top talent is very difficult. Until the development of human capital is regarded as precious, attracting and retaining staff will be a major risk factor for all companies.” © 2010 Stone House Consulting, LLC 28

33. M&A Activity Reasons to acquire: Obtain new or complementary strategy Successful track record of target firm Existing client base of target firm Obtain new or complementary distribution channel Obtain new or complementary infrastructure (operations, IT, compliance, client service, internal finance) Create scale Reputation Reasons to be acquired: Expansion opportunities No transition plan for key executives Re-focus on investment management Inadequate infrastructure Poor track record Lack of scale Liquidity for founders Reputation © 2010 Stone House Consulting, LLC 31

42. Hedge against staff turnover (though generally not a short-term solution)

43. Meet transparency demands

44. Systems / service evaluation / selection

45. Implementation services

46. Operational reviews

47. GIPS® verifications

48. Compliance reviews

49. Mock audits

50. Surprise audits

51. SAS 70sIn some instances, new investment accounting systems may be the solution

52. What Are the Implications? Greater requirements on fund administrators, prime brokers, custodians and auditors resulting from increased due diligence on service providers Ultimately this will be an annual process Potential demands to segregate service providers This could have sweeping consequences for some large, global custodians Service providers will focus on client diversification to ensure they are viewed as independent Unbundled offerings by prime brokers – and custodians © 2010 Stone House Consulting, LLC 40

53. How Do We Position Ourselves Most Effectively? Investment Managers Develop a long-term business strategy What will the firm – and its competitors – look like in five years? What will differentiate it? What will the firm require that is does not have today? How will the firm achieve the ‘future state?’ Discontinue unprofitable products or business lines First requires methodology for determining true cost of managing a product or business line Create a scalable infrastructure Focus on number of accounts managed (pooled vehicles v. separate accounts) Control and manage customization Automate where possible Develop rational operational risk management Shared services models and / or outsourcing where appropriate © 2010 Stone House Consulting, LLC 41

54. How Do We Position Ourselves Most Effectively? Investment Managers Bolster (or create!) a due diligence process Consider scorecards on key service providers Develop a strategic approach to transparency Ensure staff are appropriately trained and incented to perform well and limit turnover in all areas Increase front-office awareness of the inner-workings of the middle- and back-office Cross-train all staff to increase knowledge and create a hedge against turnover Teach staff to always consider which hat they are wearing © 2010 Stone House Consulting, LLC 42

55. How Do We Position Ourselves Most Effectively? Service Providers Consider the ‘what-if’ scenario in which key offerings are no longer under a single umbrella Custody Fund administration Securities lending Investment operations outsourcing Investment management Reconsider if approaching a single-record approach to custody, fund administration and investment operations outsourcing If there is an error, how will it be caught? Be prepared to demonstrate to clients how unit costs on services provided compare to initial costs (or pre-implementation costs) Proactively help clients with operational risk management KPI dashboards Custodian and counterparty scorecards Develop a strategic approach to transparency Ensure staff are appropriately trained and incented to perform well and limit turnover in all areas © 2010 Stone House Consulting, LLC 43

56. About Stone House Consulting Strategic, operational and IT consulting for investment managers and hedge funds Breadth of knowledge. We have proven, hands-on experience across all instrument types and all investment vehicles, including institutional separate accounts, mutual funds, hedge funds, private equity funds and SMA (‘wrap’) accounts. First-hand experience. We have worked as consultants – and we have worked on the buy side. We understand the competing demands, requirements, deadlines and priorities that our clients face every day. And we have seen the pitfalls first hand. The Cornerstone program. Our flagship program, Cornerstone, is designed to ensure asset managers reduce their costs by 10-30% within a year. © 2010 Stone House Consulting, LLC 44

57. Holly H. Miller Holly H. Miller is a partner at Stone House Consulting, LLC, providing strategic, operational and IT consulting services to investment managers and hedge funds. Prior to founding Stone House Consulting, she was Chief Operating Officer at M.D. Sass Investors Services, managing $15 billion in hedge funds, private equity funds, traditional separate accounts and SMA (‘wrap’) accounts across 18 investment strategies and 15 investment management firms, including Waterfall Asset Management, Resurgence Asset Management, Re/Enterprise Asset Management, Crow Point Partners, Arcadia Asset Management, Ascent Real Estate Partners, Denahi Global Investments, Taurus Funds Management, Three Kingdoms Capital and M.D. Sass-Macquarie Financial Strategies. During her 30-year career, Ms. Miller was East Coast Region Manager for Citisoft, Inc. where her clients included Nuveen Investments, Dimensional Fund Advisors, Lord Abbett, T. Rowe Price and DuPont Capital Management. She has also managed operations teams for Bank Julius Baer, J.&W. Seligman and Citigroup. Ms. Miller’s understanding of all aspects of the investment management and hedge fund business from investment decision-making to sales and marketing to trade settlement to performance measurement, coupled with her seasoned project management skills, result in a powerful ability to assist clients with long-term strategic planning, evaluating outsourcing, streamlining operational processes, selecting and implementing systems, cutting costs and reducing risk. © 2010 Stone House Consulting, LLC 45

58. Contact Details Holly H. Miller Partner +1 610 358 1791 phone +1 917 587 2411 cell +1 509 479 1831 fax hmiller@stonehouseconsulting.com Stone House Consulting, LLC Strategic, operational and IT consulting for investment managers and hedge funds www.stonehouseconsulting.com New York | Philadelphia | Wilmington 46 © 2010 Stone House Consulting, LLC

Omgeo North American Advisory Board 20 Jan 2010

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Omgeo North American Advisory Board 20 Jan 2010

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