PRIME BROKERAGE

APRIL 2012

March 12 Hedge Fund Recap

1.0 HIGHLIGHTS

Strategic Content Group (PBContent@morganstanley.com)

This memorandum is not a product of Morgan Stanleys Research Department and you should not regard it as a research report. For Institutional Use Only.

1.1 KEY FIGURES

Japanese Equities Net Sold in March as Equity Market Continues to Rally (Figure 9)

Based on our initial sample of returns, Hedge Funds had positive returns for the third consecutive month as the median return was +0.68% and the average return was +0.32% in March (Section 2.0) o o The median YTD return was +5.06%, while the average YTD return was +5.76% Based on aggregate equity holdings with Morgan Stanley, global HF longs increased faster than both shorts and the broader equity market for the third consecutive month. Info Tech and Financials performed best YTD and performed well in March

Equity Net Trading as a % of Total Global Net Exp.

2.0 1.6 1.2 0.8 0.4 0.0 (0.4)

Nikkei YTD Rtn

25 20 15 10 5 0 -5

Leverage changes were inconsistent across regions as markets were less directional in March (Section 3.0) o Europe net increased in March, but still remains below its end of 2011 level. US net was flat month/month and Asia net decreased

Japan Net Activity (LS)

Nikkei 225 Return (RS)

Source: Morgan Stanley Prime Brokerage, Bloomberg, Data as of Mar 30, 2012

Net buying continued in March, albeit at the slowest monthly pace YTD as we saw some net selling during the last two weeks of March (1) (Section 4.0) o While we continued to see net buying in North American and European equities, Asian equities turned net sold across regions with Japan the most net sold in March

Info Tech Long/Short Ratio Highest Since Jan 2010 (Figure 11)

Sector Cons Disc Cons Stap Energy Financials Health Care Industrials Info Tech Materials Telecom Utilities ETF Total

Dec-09 Dec-10 Dec-11 Jan-12 Feb-12 Mar-12 1.67 2.73 1.60 1.73 2.20 1.35 2.67 2.15 1.13 1.14 0.28 1.62 1.78 1.88 2.03 1.82 2.09 1.58 2.17 2.19 1.37 1.16 0.35 1.66 1.83 1.50 2.27 1.70 1.94 1.70 2.32 2.15 1.05 1.33 0.40 1.69 1.80 1.81 2.09 1.65 1.81 1.83 2.29 1.90 0.96 1.43 0.55 1.72 2.00 1.67 1.97 1.71 1.90 1.88 2.36 1.78 0.85 1.38 0.41 1.73 2.02 1.55 2.03 1.76 1.98 1.90 2.60 1.89 0.76 1.45 0.45 1.76

In the U.S., Materials was the most net bought sector in March after being one of the most net sold sectors in Jan and Feb (Section 5.0) o Info Tech was net bought for the second consecutive month as it continued to outperform. By the end of March, the Tech long/short ratio increased to 2.60, the highest level since Jan 2010

Sentiment seems to be cautiously optimistic as Hedge Funds continue to capture upside in a riskon environment. All regions have seen an increase in demand for Equity L/S and continued demand for Credit (Section 6.0)

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012 Note: U.S. Long / Short Ratios are measured as [LMV / (absolute value (SMV))] across all U.S. clients and all U.S. listed cash equities held with Morgan Stanley Prime Brokerage.

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity.
APRIL 2012

PRIME BROKERAGE

2.0 PERFORMANCE(2) Third Positive Month

Figure 1: Performance Details (%) (2)

Based on our initial sample of returns, Hedge Funds had positive returns for the third consecutive month as the median return was +0.68% and the average return was +0.32% in March (Figure 1) o The median YTD return was +5.06%, while the average YTD return was +5.76%

All Funds Mar Median Mean % Up Percentiles 95th 75th 50th 25th 5th # Funds 3.70 1.70 0.68 (0.89) (4.61) 230 16.79 8.44 5.06 1.82 (2.26) 228 0.68 0.32 62 YTD 5.06 5.76 85

Equity L/S Mar 0.95 0.62 66 3.93 1.94 0.95 (0.61) (3.36) 122 YTD 6.45 6.58 91 15.94 9.90 6.45 2.49 (1.51) 122

With the S&P 500 rising 3.3% in March, but many non-US equity markets seeing declines such that the MSCI AC World index only rose 0.7%, the median L/S fund was up 0.95% in March and the average was up 0.62% o Over 90% of Equity L/S funds are up YTD with a median return of +6.45% YTD and an average return of +6.58% YTD the S&P 500 rose 12.6% and the MSCI AC World rose 12.0%

Source: Morgan Stanley Prime Brokerage, Returns as of March 30, 2012

Figure 2: March is Third Consecutive Month of Positive Returns (2)

Return (%)
15

Based on aggregate equity holdings with Morgan Stanley, for the third consecutive month global HF longs increased faster than both shorts and the broader equity market (Figure 3) o On a YTD basis, longs have appreciated 16.2% while shorts have appreciated 11.9% and the MSCI AC World has increased 12.0% Adding to earlier gains in Jan and Feb, Info Tech and Financials continued to perform well in March. For IT, Internet Software & Services was a key contributor in March on the long and short sides while Computers & Peripherals is the key contributor YTD. For Financials, Diversified Financials is the key contributor on the long side YTD In addition to IT and Financials, Consumer sectors performed well in March While Health Care performed better in March than in Jan and Feb, its the only sector in which shorts have appreciated more than longs YTD

10

-5

-10 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 All - Median Equity L/S - Median S&P 500 MSCI AC World

Source: Morgan Stanley Prime Brokerage, Bloomberg, Returns as of Mar 30, 2012

o o

Figure 3: Sector Appreciation of Global Equity Positions in Mar (3)

Sector Cons Disc Cons Stap Energy Financials Health Care Industrials Info Tech Materials Telecom Utilities ETF & Other Total

Long Appreciation 4.3 3.4 -3.5 4.4 4.0 0.4 5.7 -2.7 2.7 -0.5 -1.0 2.9

Short Difference AppreBtwn Long MSCI AC ciation and Short World TR 1.9 2.5 2.8 1.1 -4.7 2.5 3.3 -1.3 1.7 -3.6 0.9 -1.0 1.1 0.8 2.3 1.2 1.9 0.7 1.7 4.0 0.9 1.8 0.5 -2.1 2.1 0.7 3.0 -4.8 1.2 3.1 -0.1 4.2 -4.2 0.2 0.2

Source: FactSet, Morgan Stanley Prime Brokerage, Data as of March 30, 2012

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. APRIL 2012

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3.0 LEVERAGE(4) Leverage Changes Mixed in March

Figure 4: Recent Leverage Figures

End of Mar 2012 Month / Month Gross 4% (6%) 2% Net 0% 5% (3%) YTD Gross 15% 16% 23% Net 7% (3%) 15%

Leverage changes were inconsistent across regions as markets were less directional in March (Figures 4 & 5) In the U.S., gross ticked up further while net was flat M/M o While gross is at the same levels as one year ago, net is 12 percentage points lower and low relative to the VIX (Figure 6) Gross leverage increased 4% in March with most of the increase coming during the first half of the month Net leverage reached its YTD high of 55% on March 19 for the second time this year (first time was February 9) before declining slightly into month-end

Gross U.S. Europe Asia 157% 203% 138%

Net 53% 30% 48%

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012 Note: Figures across all regions are 5-day averages

Figure 5: Regional Equity L/S Gross and Net Leverage(4)

US Median Gross Lev (%)

170% 160% 150% 140% 130% 120% 110% US Gross (LS) 100% Jan-10 Jul-10 Jan-11

US Median Net Lev (%)

100% 90% 80% 70% 60% 50% 40% US Net (RS) 30% Jul-11 Jan-12

Europe net leverage increased to as much as 32% in mid-March, near the high end of its six month range of 21% to 34%. It ended the month at 30% o In line with the general trend of the MSCI Europe index, Europe gross leverage increased midmonth before pulling back to end March 6% below its end of February level

EU Average Gross Lev (%)

220% 210% 200% 190% 180% 170% 160% 150%

EU Average Net Lev (%)

80% 70% 60% 50% 40% 30% 20% 10%

After increasing from 33% at the end of 2011 to as high as 55% in mid-March, Asia net leverage declined 7% to end March at 48%. The decline in the second half of March came as the Shanghai Composite pulled back but the Nikkei maintained its ascent o Asia gross leverage continued to tick higher and increased another 2% in March to 138%

Figure 6: US Net Leverage vs. VIX

Europe Gross (LS)

Europe Net (RS) 0% Jul-11 Jan-12

Net Leverage
70%

VIX (Inverted)
5

140% Jan-10

Jul-10

Jan-11

Asia Median Gross Lev (%)

60% 15
150% 140%

Asia Median Net Lev (%)

100% 90% 80% 70% 60% 50% 40% 30% 20%

50%

25

130% 120% 110%

40%

35

30%

45

100% 90%

20% Net Leverage (LS) 10% Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 VIX (RS)

55
80% 70% Asia Gross (LS) 60% Jan-10 Jul-10 Jan-11 Asia Net (RS) 10% Jul-11 Jan-12

65 Jul-11 Jan-12

Source: Morgan Stanley Prime Brokerage, Bloomberg, Data as of Mar 30, 2012

Source: Morgan Stanley Prime Brokerage, global data as of Mar 30, 2012 Note: Figures across all regions are 5-day averages

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. APRIL 2012

PRIME BROKERAGE

4.0 TRADING ACTIVITY(1) Hedge Funds Continue to Buy DM in March, Sell EM as EM Underperforms DM

Figure 7: DM Net Bought and EM Net Sold in March

Cumulative Equity Net Trading as a % of Total Global Net Exposure

15 10 5 0 (5)

GLOBAL ACTIVITY Net buying continued in March, albeit at the slowest monthly pace YTD as we saw some net selling during the last two weeks of March Equity L/S and Stat Arb / Quant funds were net buyers in March while Multi-Strat / Macro funds were net sellers Excluding the U.S. holiday on Feb 20, average daily volumes declined 3% in March as compared to February o Equity L/S funds saw volumes decline 7% month/month, while Multi-Strat/Macro volumes rose 7% month/month Volumes in European equities continued to increase in March, rising another 6% month/month after a 15% rise in Feb After seeing a rise in volumes of almost 40% in Feb, Japanese equity volumes on our books declined about 15%

(10) (15)

Apr-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

May-11

Feb-11

Mar-11

Jan-12

Jan-11

Jun-11

Jul-11

Feb-12
EM

EEM/MSCI World Cum. Rtn

DM

Source: Morgan Stanley Prime Brokerage, Bloomberg, Data as of Mar 30, 2012

Figure 8: Asia Turns Net Sold in March

Equity Net Trading as a % of Total Global Net Exposure

6.0 5.0 4.0 3.0

REGIONAL ACTIVITY The MSCI World index climbed another 1.3% in March and the MSCI EM index declined 3.3%. In line with these returns, we saw DM net bought and EM net sold in March (Figure 7) While we continued to see net buying in North American and European equities, Asian equities turned net sold across regions with Japan the most net sold in March (Figure 8) o The net buying of Japan slowed in late February before turning decisively better for sale in the second half of March (Figure 9). The net selling was led by Equity L/S funds, although most strategies were net sellers in the second half of the month

2.0 1.0 0.0 (1.0) (2.0) North America Europe Other EM EMEA LatAm Pacific Ex EM Asia Japan Mar-12 Japan

Jan-12

Feb-12

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012

Figure 9: Japanese Equities Net Sold in March as Equity Market Continues to Rally

Equity Net Trading as a % of Total Global Net Exp.

2.0 1.6 1.2 0.8 0.4 0.0 (0.4)

Nikkei YTD Rtn

25 20 15 10 5 0 -5

Japan Net Activity (LS) Nikkei 225 Return (RS) Source: Morgan Stanley Prime Brokerage, Bloomberg, Data as of Mar 30, 2012

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. APRIL 2012

Mar-12

(20)

PRIME BROKERAGE

5.0 US SECTOR ACTIVITY(1,5) Materials Flips to Net Bought in March, Info Tech Buying Continues

Figure 10: U.S. Sector Net Activity and Returns

Mar 2012 Net Activity Mar 2012 Return (%)
0.37 5.07 (3.34) S&P 500: 3.3 4.60 4.44 1.24 1.36 7.52 1.21 3.43 0.5 1.0 (5) 0 5 10

In the U.S., 7 of 10 sectors were net bought in March as we saw net buying of single-names and ETFs (Figure 10) Materials was the most net bought sector in March after being one of the most net sold sectors in Jan and Feb o The reversal was primarily due to Stat Arb/Quant funds switching to net buyers after being the largest net sellers of Materials in Jan and Feb Fundamental Equity L/S funds, however, continued to be net sellers of Materials for the 5th consecutive month

Materials Info Tech Energy Cons. Disc. Healthcare Industrials Utilities Financials Telecom Cons. Stap. (1.0) (0.5) 0.0

2012 Net Activity

Cons. Disc. Info Tech Industrials Healthcare

2012 Return (%)

15.96 21.46 11.31 9.06 3.88 (1.62) 5.54 11.19 22.05 2.08 S&P 500: 12.6

Info Tech was net bought for the second consecutive month as the sector has been one of the top performers, up 21% YTD o The long/short ratio at 2.60 is the highest level since Jan 2010, primarily due to longs added across strategies over the past two months Net buying has been widespread across industries YTD, with 7 of 8 industries net bought. Semis was the most net bought, while Computers & Peripherals was the most net sold due to selling in Feb and March

Energy Utilities Cons. Stap. Materials Financials Telecom (1.0) (0.5) 0.0 0.5 1.0 (10) 0

10

20

30

Consumer Staples was one of the most net sold sectors for the second month in a row as the sector saw shorts added across strategies in March o The long/short ratio decreased from 1.67 in February to 1.55 in March, and is at the lowest level since the beginning of 2012

Source: Bloomberg, Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012 Note: Net Activity charts are meant to give directional indications of activity. The sector with the largest absolute change in activity is indexed to +1 or -1 with the other sectors indexed to it. Sector returns are based on the S&P 500 GICS sector returns.

Figure 11: U.S. Long/Short Ratio by Sector

Telecom continued to see net selling in March and is the most net sold sector YTD which has caused its long/short ratio to drop further. Aside from ETFs, it is the only sector with a L/S ratio below 1 Cons Disc was net bought for the third consecutive month and is the most net bought sector YTD o Stat Arb/Quant funds are the largest net buyers of Consumer Discretionary YTD despite being the largest net seller in March Textiles, Apparel & Luxury Goods was the most net bought industry in March

Sector Cons Disc Cons Stap Energy Financials Health Care Industrials Info Tech Materials Telecom Utilities ETF Total

Dec-09 Dec-10 Dec-11 Jan-12 Feb-12 Mar-12 1.67 2.73 1.60 1.73 2.20 1.35 2.67 2.15 1.13 1.14 0.28 1.62 1.78 1.88 2.03 1.82 2.09 1.58 2.17 2.19 1.37 1.16 0.35 1.66 1.83 1.50 2.27 1.70 1.94 1.70 2.32 2.15 1.05 1.33 0.40 1.69 1.80 1.81 2.09 1.65 1.81 1.83 2.29 1.90 0.96 1.43 0.55 1.72 2.00 1.67 1.97 1.71 1.90 1.88 2.36 1.78 0.85 1.38 0.41 1.73 2.02 1.55 2.03 1.76 1.98 1.90 2.60 1.89 0.76 1.45 0.45 1.76

Financials was slightly net sold in March after having been net bought in Feb o Diversified Financials saw most of the net selling in March and this was mostly offset by net buying in Insurance and Real Estate

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012 Note: U.S. Long / Short Ratios are measured as [LMV / (absolute value (SMV))] across all U.S. clients and all U.S. listed cash equities held with Morgan Stanley Prime Brokerage.

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. APRIL 2012

PRIME BROKERAGE

6.0 CAPITAL INTRODUCTIONS UPDATES(6)

testament to the strong demand for fundamental Event Driven strategies Europe Geneva: Appetite for equity strategies has returned, but is mainly focused on US equities where they are more bullish on the macro situation Asia: We continue to see a healthy level of interest for Asian Credit strategies and Fundamental Equity L/S remains a key area of interest o New launches continue to get attention from investors across different strategies

FLOWS AND OVERALL INDUSTRY SENTIMENT Sentiment seems to be cautiously optimistic as Hedge Funds continue to capture upside in a riskon environment US: Manager flows seem to be picking up marginally with visibility to stronger commitments in early Q2 Europe UK: Cautious optimism on the outlook for Europe in 2012 continues to improve. We saw an increase in US investors travelling to Europe in Q1, indicating a consistent view that we may have seen the bottom in Europe and now is a good entry point Asia: As investors continue to search for new ideas to introduce into their portfolios, we see a number of portfolio reallocations occurring, but no meaningful new inflows into the industry o We are starting to see a small increase in risk appetite as investors want to play catch-up in the recent rally. However, as investors are aware that there are a number of new launches in the pipeline for Q2 and Q3, they may wait to see how these news launches fare before allocating

INVESTOR VERTICAL UPDATES US: Endowments & Foundations have reported reducing cash levels; however, current levels are still higher than normal. Additionally, appetite for non-US exposure is driving many groups to look abroad (with a noted uptick in international travel) for talent (hedge funds, long-only, private equity and real estate) US: Most Family Offices are increasing their due diligence timeframe in an effort to perform more rigorous due diligence, particularly with a renewed focus on operational due diligence Europe UK: We continue to see an increasing amount of larger FOF's launching early stage and seed manager vehicles. Our current view is that there is approximately $10Bn in seed capital globally waiting to be deployed, so the opportunity for capturing talent remains high Europe Geneva: FoFs have restructured their businesses to cater for the institutional market and have subsequently seen flows o o Private Banks focusing on building in-house managed account solutions continues to be a trend Consolidation is expected to continue within Private Banks and Family Offices. Outperforming Multi-Family Offices have started to win business

Asia: Fee discounts are a much talked about topic. We are starting to see some managers offering discounted share classes to encourage investors to allocate earlier, but they are largely concepts which managers are willing to discuss

STRATEGIES OF INTEREST US: In March, we saw an overall increase in manager searches as investors continue to source new ideas and strategies US: There has been a recent uptick in global emerging markets interest as some investors have noted underweight exposure o Equity Long/Short interest continues to increase from early Q1 lows with bifurcated requests for exposures (relatively even split between longer biased mandates versus low net/market neutral mandates) Non-Equity searches, including Macro and Credit, remained relatively constant compared to January and February

Asia: On the back of the AIJ announcement, Japanese investors remain prudent with respect to their hedge fund allocations. While we have not seen any material redemptions, new subscriptions remain on hold until further clarity emerges

Europe UK: In March we have seen an uptick in appetite for European L/S strategies. We also continue to see requests for Credit and Distressed funds and the recent growth of funds like OVS is a

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. APRIL 2012

PRIME BROKERAGE

Notes: (1) Hedge Fund trading activity bullets are based on trading across all cash single-name, cash ETF, and swap global equities within Morgan Stanley Prime Brokerage accounts. The U.S. sector related bullets and charts on trading activity in Section 5.0 are based on trading across all single-name (non-ETF) US equities within all US Morgan Stanley Prime Brokerage accounts. (2) All performance values are net of fees and are based on investor letters collected by Morgan Stanley Prime Brokerage through March 4, 2012. Morgan Stanley does not and cannot verify the accuracy of the information contained in these letters. S&P 500 Index and MSCI AC World Index returns sourced from Bloomberg. (3) Based on broad sample of largest holdings with Morgan Stanley Prime Brokerage. Securities include all global single-name equities and ETFs. (4) Gross Leverage = (Long Exp + Absolute Value (Short Exp)) / Equity; Net Leverage = (Long Exp - Absolute Value (Short Exp)) / Equity. US and Asia "Leverage levels" are 5-day averages of daily medians, while Europe levels are 5-day averages of daily simple (non-weighted) averages. All exposures are delta-adjusted. All samples include accounts with a minimum account equity and have been rebalanced at least every 6-12 months to keep sample representative of historical accounts. US sample reflects a broad sample of US based Equity Long/Short funds. The Europe sample is based on a selection of the largest Europe focused Equity Long/Short funds. The Asia sample includes all Asia-based accounts and non Asia-based accounts with greater than 50% of gross assets exposed to APAC. The vast majority of funds in the Asia sample are Equity L/S funds. The most recent U.S. leverage levels and data back to January 2010 can be made available regularly upon request. (5) Market returns sourced from Bloomberg. (6) Source: Based on observations expressed by managers and investors during discussions with the Morgan Stanley Capital Introductions team.

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The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity. 7 APRIL 2012