G.I.

ALTERNATIVE HEDGE STRATEGY APRIL 2013

GI CAPITAL

G.I. Alternative Hedge Strategy Pool

The Alternative Hedge Strategy is an alternative to traditional bond funds, which although carry very low credit risk, currently have minimal return; and to equity funds that exhibit high volatility. The Alternative Hedge Strategy seeks to invest in alternative strategies like hedge funds, private equity, and real estate, which offer higher returns, at a reasonable risk, while minimizing exposure to global stock and bond markets. The fund provides access to sophisticated private investment vehicles traditionally reserved for large pension plans and the ultra high net worth investors. The strategys objectives are to preserve capital, minimize volatility, have a low or zero correlation with stock and bond markets, and achieve an annual return of 7-9% net of fees. The pool is a core holding across all of GIs managed accounts.

PORTFOLIO PERFORMANCE FOR ALTERNATIVE HEDGE STRATEGY

Ye a r 2011 2012 2013 0.19% 2.10% - 0.29% 1.15% 0.49% 1.45% 0.07% 0.45% 3.16% - 1.32% - 0.83% 0.22% 1.55% 1.40% - 0.16% Jan Fe b Mar A pr May J un J ul A ug Sep Oc t N ov Dec - 0.20% 0.60% Tot a l - 0.20% 5 . 18 % 5.22%

STRATEGY
Securitized Mortgages High Yield Bond Strategies Private Distressed Debt Hedged Fixed Income Distressed Real Estate

COUNTRY
US US US CAN US

DESCRIPTION
Long senior or mezzanine tranches of securitized bonds (RMBS, CMBS, CDOs, CLOs) through granular analysis of underlying assets in the pool. Hedged through tactically shorting the ABX (RMBS Index), etc. Publically traded bonds that have fallen below 75% of their par value. High current yields and yield to maturity. Some hedging through shorts on equities and non-distressed bonds. Private placements into charged off consumer debt at a severe discount to face value (ie 1-2% of par value). Purchased from distressed banks trying to clean up their balance sheets. High quality fixed income fund which has been hedged against a rise in interest rates. Private placements into real property with positive cash flows, purchased at significant discounts to replacement cost.

INVESTMENT BY ASSET CLASS

Distressed Real Estate

MONTH PERFORMANCE BY STRATEGY

-2.01% 2.70% -1.89% 1.95% 2.11% 1.00%
Global Macro Long/Short MLP Hedged Fixed Income High Yield Bond Strategies Securitized Mortgages Private Distressed Debt Distressed Real Estate Other

7%

6% 3%

17% 17%

Hedged Fixed Income High Yield Bond Strategies Global Macro Private Distressed Debt Securitized Mortgages 0.00% Long/Short MLP Cash 0.00%

30% 4% 15%

FEATURE INVESTMENT
High Yield Bond Strategies: This is a hedge fund strategy that buys distressed bonds and holds them to maturity or until they have substantially recovered. Bonds are usually issued at a par value of $100. When there is a negative company specific event, these bonds can trade down in the $50-80 range, resulting in a typical Yield-to-Maturity of 18-24%/annum. One could argue that they are priced this way because of the risk of bankruptcy, but about 80% of these stressed issues do not go bankrupt. And of the 20% that do, the average recovery rate is ~$43. A more likely cause of the distressed pricing is from a lack of liquidity. When these companies experience the negative event, the bonds often get down-graded by the rating agencies. These lower ratings often cause their institutional holders to have to sell, as they may have a mandate to hold a minimum credit quality, ie BBB and above. This can result in forced selling at very attractive prices from the buyers perspective. Another reason for mis-pricings in this space is that given its small size, there is not a lot of dollars chasing these returns. Stressed bonds in the US make up only 3% of the overall market. At the funds current average price of $65 (per average holding), they have a current cash yield of 13%. Assuming a 15% default rate and recovery to $90 on the bonds that dont default, the fund projects an 18% annualized rate of return.
This monthly update does not constitute or purport to constitute a complete description of the G.I. Capital Corp. Alternative Hedge Strategy and is in all respects subject to the more detailed provisions found in the fund's declaration of trust. The Alternative Hedge Strategy is only available to GI clients who have engaged GI to manage their account under the alternative income/hedge mandate as outlined in their investment policy statement. The returns above are net of all fees, including management fees at a rate of 1.5% but excluding performance fees which are calculated at the managed account level. The references to the target rates of return are provided for illustrative purposes only and there can be no assurance that the fund will be able to achieve the targeted rates of return.