Presentation for VBA May 2008 Wouter ten Brinke, CFA

1. Bubble Talk Presentation for VBA May 2008 Wouter ten Brinke, CFA

2. Agenda • Introduction Theta Capital Management • Financial alchemy: growth of the non-bank banking system • Deflating the credit bubble: the cycle in reverse • Long/short investing: how to benefit from upcoming opportunities

3. Theta Capital Management • Independent Hedge Fund Boutique • Founded in January 2001 • Management of multi-hedge fund portfolios • EUR 950m AuM in customized mandates & funds of funds • EUR 600m in Medium Volatility strategy • EUR 200m in Low Volatility strategy • EUR 150m in Deep Value strategy • Staff of 8 investment professionals and 4 support • Research-driven investment process • Advisory board of hedge fund experts

4. Theta Capital Management • Products

5. Agenda • Introduction Theta Capital Management • Financial alchemy: growth of the non-bank banking system • Deflating the credit bubble: the cycle in reverse • Long/short investing: how to benefit from upcoming opportunities

6. 12 X leverage Financial alchemy

7. Financial alchemy

8. Financial alchemy

9. Financial alchemy

10. 94 X leverage ! Financial alchemy

11. Financial alchemy • The result: a shadow banking system • CDO’s turned low quality assets into combination of high and low rated assets • CDO’s provided additional capital to weak lenders, adding leverage to the system • CDO’s segregated risk takers from risk assessors (leveraged & engineered pools of credit replaced old-fashioned credit analysis) • All these vehicles are effectively non-regulated banks, not required to hold reserves, except as negotiated with the rating agencies • Agents had similar incentives: banks, rating agencies, CDO managers

12. Inflating the credit bubble • Leverage in US defies the long-term trend

13. Inflating the credit bubble Source: Theta

14. Inflating the credit bubble Crucial element: it is the new liquidity that supports the asset values and keep existing investors happy Source: Theta

15. Inflating the credit bubble • Financial Instability Hypothesis (Hyman Minsky, 1982) • Financial structure becomes more fragile over periods of prosperity • We fall in love with innovations (with no history, by definition) • In prosperity, we are gradually testing the limits of the market, but the adjustment and revaluation can be sudden and violent

16. Agenda • Introduction Theta Capital Management • Financial alchemy: growth of the non-bank banking system • Deflating the credit bubble: the cycle in reverse • Long/short investing: how to benefit from upcoming opportunities

17. Deflating the credit bubble: cycle in reverse

18. Deflating the credit bubble: mortgage credit • Long-term investment theme: US Housing market

19. Deflating the credit bubble: mortgage credit • Long-term investment theme: US Housing market

20. Deflating the credit bubble: mortgage credit • Long-term investment theme: US Housing market

21. Credit support for ABX tranches 4y Cumulative HPA AAA 23.9% Mortgagepool -40% AA 14.0% -20% A 8.6% +5% BBB 5.6% +20% BBB- 4.5% 0% Source: Citi, Theta Deflating the credit bubble: mortgage credit • Long-term investment theme: US Housing market

22. Moody’s expected loss: 0.001% 0.025% 0.180% 1.309% Deflating the credit bubble: mortgage credit • Long-term investment theme (2006): US Housing market

23. Who’s next? The weakest hands • Funding liquidity risk • Funding risk = liabilities reprice before assets reprice • Who can post collateral when the market moves against him? • Weak hands: the importance of long-term funding (SIV, CLO, TRS) • Counterparty risk • CDS market has grown 10X in last 4 years • Who is selling CDS? (source: BBA) • 34% Banks • 21% Insurance companies • 15% Hedge funds • 14% Securities houses • 16% Other

24. Who’s next? Corporate credit

25. Who’s next? Corporate credit • Never before have we turned the credit (and economic) cycle with so much • leverage in the system

26. Who’s next? Commercial real estate • Lending standards are tightening...

27. Agenda • Introduction Theta Capital Management • Financial alchemy: growth of the non-bank banking system • Deflating the credit bubble: the cycle in reverse • Long/short investing: how to benefit from upcoming opportunities

28. How to benefit? • During the credit unwind (short positions): • Mortgage credit: residential & commercial, US & Europe • Other US consumer credit: credit cards & autoloans • Corporate credit: focus on HY and lower rated tranches with default risk rather than spread risk • After the credit unwind (establish deep value long positions): • Distressed ABS • Distressed corporate credit • More volatility/price dispersion in all risky assets (example trades): • ABS, corporate debt, equity long/short • Emerging markets sovereign debt • European sovereign debt

29. The credit opportunity set

30. Long/short emerging markets • No broad decoupling but divergence between countries Components: inflation, fiscal balance, debt/GBP ratio, current account, FX reserves, trade/GDP, FDI/GDP

31. Long/short emerging markets • Example portfolio

32. European Sovereign Divergence • The Stability Pact is dead and the ECB will not bail out

33. European Sovereign Divergence “EU bond markets begin to diverge” Wall Street Journal, 7 Feb 2008 “Europe ministers call on France to meet budget pledge” Bloomberg, 12 Feb 2008

34. Theta Capital Management • Contact Details • Theta Capital Management B.V. • Johannes Vermeerstraat 9 • 1071 DK Amsterdam • The Netherlands • Telephone: +31 (0) 20 5722733 • Fax: +31 (0) 20 5722744 • E-mail: info@thetacapital.com • Website: www.thetacapital.com