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<div style="text-align: center"><span style="font-weight: bold; font-family: verdana,arial,helvetica,sans-serif">Fiduciary<em>ALERT</em></span>™ <strong>July 2007</strong></div>
<div style="text-align: center"><span style="text-decoration: underline;"><span style="font-weight: bold; font-family: verdana,arial,helvetica,sans-serif">Hedge Funds - Losses, Leverage, Liquidity and Litigation <br />Sub prime mortgages, Collateralized Debt Obligations CDOs, SIVs, ABCP</span></span></div>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Are all hedge fund investors "on their own"? Or are hedge funds fiduciaries?</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">What is the nature of representations of hedge funds': advisers, promoters, accountants, consultants, finders, prime brokers, lenders, broker dealers, fund of funds sponsors initial and continuing fiduciary duty to investors?</span></span></li>
</ul>
<span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Hedge funds, private placements, SIVs are unregistered entities, these vehicles are desirable if they deliver verifiable, transparent, non-correlated, risk adjusted returns to investors.</span><br /><br /><span style="text-decoration: underline;"><span style="font-family: verdana, geneva;">Some Hedge fund and SIV pitfalls include but are not limited to:</span></span><br /></span>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Hedge funds and SIVs, off balance sheet entities unregulated vehicles lack basic investor protections and contain many serious conflicts of interest,</span></span>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">managers' compensation is improperly inflated due to: </span></span></li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">value securities as they like, <span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">notably CDOs; ABCP collateralized in some cases by sub prime mortgage backed securities,</span></span></span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">often lack independent, objective third party oversight,</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">borrow against inflated collateral in the hopes of juicing returns,</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">cross invest in affiliated, similarly unregulated investments, reduce transparency,</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">fraudulent counterparties can create the illusion of orderly markets for certain securities' valuation,</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">cannot control timing of forced buy-ins of short positions; long-short strategies are very prominent. </span></span></li>
</ul>
</li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Sub prime mortgages, packaged and securitized sometimes as collateralized debt obligations (CDOs) are a recent innovation, investors have little investment experience.</span></span></li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Asset backed securities including ABCP, collateralized by mortgages, credit card receivables, rental cars, even royalties from a music catalog are not fungible, they respresent unique, discrete slices of the underlying assets.</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Unfortunately some Hedge funds, trying to juice profits, borrowed heavily and leveraged their assets, whose valuation depends on liquidity in institutional markets, so called dark pools of liquidity and other means of trading including quantitative, black box, algorithmic trading models premised upon estimated correlations and standard deviation.</span></span></li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">A potential solution:</span></span>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Technology affords a way to anonymously monitor and align hedge funds and SIVs asset valuation, credit and leverage decisions to banks Basel II principles with a type of capital charge mechanism; but then again global economic growth, (fueled by trade ups and cash out refi's in residential real estate, itself underpinned by eyes-closed mortgage underwriting, generation low interest rates and securitization on steroids) would not have been as robust in the post technology bubble era. </span></span></li>
</ul>
</li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Credit rating agencies also known as ISROs or as NSROs: </span></span>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">S&P, Moody's, Fitch whose fees are paid by issuers (potential conflict of interest), assigned these securities top ratings and proved once again that their ratings lag the markets. </span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Instead they should refocus their ratings assignments on the process of mortgage lending and underwriting by banks and non-banks alike before expressing an opinion on the likelihood of a credit default.</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">These problems are <span style="text-decoration: underline;">when,</span> not if problems; transient, generation low interest rates fueled much of the rise in residential real estate valuations, the very collateral underlying mortgage backed, in particular sub prime mortgage securities.</span></span>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">One might ask if credit rating agencies could monitor such increases. More glaringly, S&P stated they had done so.</span></span></li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Unsustainable </span></span><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">escalation in value of collateral, </span></span><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">yet the AAA ratings persisted; emblematic of a preventable, correctable ratings process, one that deserves correction. </span></span></li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">It is improbable not even one of these credit ratings firms' analysts were themselves astounded by the trajectory of valuations of homes in their very own neighborhoods and or communities.</span></span></li>
</ul>
</li>
</ul>
</li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Capital, currency and commodities are globally connected. Settlement of trades is nearly immediate, disruption could unsettle all markets. Cash infusions by the operators or sponsors, market rescues, liquidity by Federal Reserve Bank through discount rate cuts, extended rollover provisions, open market operations band aid liquidity only; Fed action does not cure the credit (creditworthiness) and or valuation issues of these "securities".</span></span> </li>
</ul>
<p><span style="font-size: xx-small;"><span style="text-decoration: underline;"><span style="font-family: verdana, geneva;">Can hedge fund investors better protect themselves?</span></span></span></p>
<ul>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">It begins with understanding BEFORE making an investment in a hedge fund or private placement.</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">What is the manager's or team's experience and track record with the specific types of securities, strategies and leverage?</span></span> </li>
<li><span style="font-family: verdana, arial, helvetica, sans-serif; font-size: xx-small;">Before investing in a hedge fund, private placement or unregistered securities make sure you've done your due diligence and continue to perform due diligence; especially if the funds' performance is terrific.</span></li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Hedge fund, Private placement, RMBS, CDO or SIV Fraud, Breach of Fiduciary Duty, two types of Suitability, Mispriced Assets, Valuation discrepancies, Principal or Proprietary trading conflicts, Misrepresentation, Negligence, Theft, Embezzlement and Ponzi schemes have increased as the popularity of these investment vehicles has risen.</span></span> </li>
<li><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Initial, ongoing due diligence perfomed by a completely neutral, independent, qualified AIFA can be an essential element of the prudent exercise of fiduciary duty.<br /></span></span></li>
<li><span style="font-size: xx-small; font-weight: bold;"><span style="font-family: verdana,arial,helvetica,sans-serif">Attorneys, CPAs, Trustees, Investment Committees and ERISA Pension, Profit Sharing and 401k Plan Sponsors may contact us for objective and authoritative evaluation of the Prudence and Fiduciary Duties involved in any investment including Private Placements or Hedge Funds.</span></span></li>
</ul>
<div style="text-align: center"><span style="text-decoration: underline;"><span style="font-size: x-small;"><span style="font-family: verdana, geneva;">Neutral, Objective, Qualified & Experienced</span></span></span></div>
<div style="text-align: center"><span style="font-size: x-small;"><span style="text-decoration: underline;"><span style="font-size: x-small;"><span style="font-family: verdana, geneva;">Accredited Investment Fiduciary Analyst</span></span></span><span style="font-size: x-small;"><br /></span></span><span style="font-size: xx-small;"><br /></span>
<div style="text-align: left"><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">Contact us at <a href="mailto:info@fiduciaryexpert.com">info@fiduciaryexpert.com</a> </span></span><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">or to request Fiduciary<em>ALERT</em><span style="font-family: Verdana; font-size: 8pt;">™</span> 20</span></span><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif">04 thru 2010.</span></span></div>
</div>
<p align="center"><span style="font-size: xx-small;"><span style="font-family: verdana,arial,helvetica,sans-serif"><span style="font-family: Verdana; font-size: 8pt; mso-fareast-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman'; mso-ansi-language: EN-US; mso-fareast-language: EN-US; mso-bidi-language: AR-SA;">© </span>Copyright Chris McConnell & Associates 2007 - 2011. All rights reserved.</span></span></p>
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