THE WEEKLY BRIEF JUNE 01, 2015

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1 Merger Arbitrage Cheers M&A Spree Philippe Ferreira Head of Research Managed Account Platform Lyxor Asset Management (33) philippe.ferreira@lyxor.com The current year is on track to be the best year for M&A ever. Since the beginning of the year, global M&A volumes have reached USD 18bn according to Bloomberg, the best first five months in twenty years. Such figures include announced, pending and completed deals and are thus subject to revisions. Overall, US deals dominate, accounting for 45% of M&A activity year to date and in terms of sectors, health care is leading, followed by financials and communications. Last week, Charter formally announced the USD 79bn acquisition of Time Warner Cable, which remains subject to regulatory approval. The stock price of the target has rallied over the recent weeks, and has supported merger arbitrage players which have sizeable exposures to the deal. The deal was the strongest contributor to the performance of the strategy last week. Prior to that, the flurry of mega mergers in the pharma sector (Teva vs Mylan vs Perrigo, Actavis vs Allergan, Abbvie vs Pharmacyclics, Valeant vs Salix) has fuelled the performance of merger arbitrageurs. In May, the Lyxor Merger Arbitrage index is up 1.5% and is one of the best performing strategies year-to-date at +4.7%. As the month of May comes to an end, we note that hedge funds continued to deliver positive returns. The Lyxor Hedge Fund index (HFI) is up.4% in May (4% year to date), with all strategies, except CTAs, posting gains. The CTA drawdown is now over as market conditions have normalized. As a result, we closed our preference for short term models versus long term CTAs which has provided protection as the trend reversals unfolded in early May. We now favor medium term models as we believe it is too early to jump into long term CTAs right now. Meanwhile, we maintain our slight overweight stance on Event-Driven and turn cautious on long biased Asian L/S Equity as the Chinese stock market rally reverses. Within the Asian L/S Equity space, we have a preference for Market Neutral managers. Finally, we believe the higher volatility regime in fixed income is here to stay and we maintain our positive stance on sovereign fixed income arbitrage funds. TWC stock price has rallied, supporting Merger Arbitragers' large exposure on the stock (Average exposure of the merger arbitragers on TWC's stock vs TWC stock price) 8% 7% Avg exposure of merger arbitrage funds on the Lyxor platform, % of NAV, LHS TWC stock price, USD, RHS % 17 5% 4% 3% % 14 1% 13 % 12 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Source: Lyxor AM THIS DOCUMENT IS FOR THE EXCLUSIVE USE OF INVESTORS ACTING ON THEIR OWN ACCOUNT AND CATEGORISED EITHER AS ELIGIBLE COUNTERPARTIES OR PROFESSIONAL CLIENTS WITHIN THE MEANING OF MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE 24/39/CE OR QUALIFIED PURCHASERS WITHIN THE MEANING OF RELEVANT U.S. SECURITIES LAW. SEE IMPORTANT DISCLAIMERS AT THE END OF THIS DOCUMENT

2 THE WEEK IN 3 CHARTS Hedge Fund Snapshot: hedge funds delivered good results in May Lyxor Hedge Fund Index CTA Broad Index Event Diven Broad Index Fixed Income Broad Index L/S Equity Broad Index Global Macro S&P 5 1 Y US Treasury ( in Bps) Source: Bloomberg, Lyxor AM WTD*.6%.8%.3%.%.2% 1.5% -1.1% -15. MTD.4% -5.7% 1.1% 1.6% 1.% 1.4%.5% 14. YTD 4.% 1.4% 4.2% 1.8% 5.1% 4.5% 1.2% -5. Global M&A on track to be a record year It was a good week for hedge funds as all strategies ended the week in positive territory. The Lyxor Hedge Fund Index is up.4% in May (4%YTD), with all strategies but one posting gains. Global Macro (up 1.5%) and CTA managers (up.8%) delivered strong returns, rewarding their long exposure on USD against EUR and other currencies (JPY for CTAs and GBP for macro managers). The currency bucket was a strong driver of performance for both strategies. Within CTAs, long term models ouperformed short term ones as market conditions normalized. On the Event Driven side, the Lyxor Merger Arbitrage Index ended the week up.4%. It is one of the best performing strategies year-to-date at +4.7%, fuelled by the buoyant M&A activity amongst others. Global M&A activity during first five months of respective years, USD bn Source: Bloomberg, Lyxor AM Global M&A volumes stand out at $18bn YTD 215, up almost 65% year-on-year. This is the busiest start to the year since the mid-nineties and is likely to place 215 as the best year for global M&A ever. Such M&A activity has been supported by indicators of economic recovery, low interest rates and buoyant stockmarkets. Almost 5% of M&A activity is taking place in the US, with the healthcare sector leading the pack. The oil & gas and communication industries are also undergoing major consolidation. This buoyant M&A activity is supportive for our merger arbitrage managers. The strategy has recorded one of the best performances since the beginning of the year. The Lyxor merger arbitrage index is up 4.7% as of end-may. Major consolidation phase for healthcare, oil & gas, financials and communication sectors Source: Bloomberg, Lyxor AM 215 (ytd) M&A activity by sector, USD bn 513 Healthcare is a sector experiencing major consolidation, accounting for 1% of the global M&A activity this year with $179bn of volumes year to date. The M&A frenzy in the healthcare industry has been supportive for our merger arbitrage managers, playing large deals like Teva vs Mylan vs Perrigo, Actavis vs Allergan, Abbvie vs Pharmacyclics Accounting for 8% of the global M&A activity is Global Oil & Gas the second most active sector by volume in 215 YTD ($14 bn). This is due to one mega deal which would see Royal Dutch Shell and BG Group merge. The pending $79bn acquisition is the biggest deal in the oil and gas industry in a decade. Financial and Communication sectors are also undergoing a major consolidation phase, with large deals including Charter targeting TWC. Our Event Driven managers were rewarded on this deal as they held on to TWC's stock.

3 CTAs WTD* MTD YTD CTA Broad Index.8% -5.7% 1.4% CTA Long Term 1.% -6.% 1.4% CTA Short Term -.3% -3.8% -.3% Appreciation in USD rewarded short EUR, JPY and AUD (Net Exposure on currencies vs USD, % NAV) EUR JPY CAD AUD CHF GBP Mar-15 May-15 Other -5% -4% -3% -2% -1% % 1% 2% Asset weighted. Source: Lyxor AM Gains on long USD CTA systems ended a mixed month with a positive performance. LT systems strongly outperformed ST models last week, while the relationship was adverse over the month with ST systems posting greater returns amidst trend reversals that hurt LT systems. Equities posted negative results across the board given the sell-offs in European and US markets. Gains on Asian markets partly offset these losses. Rates posted positive results, although performance dispersion was witnessed between ST and LT systems. Fixed income returned positively as the strong decrease in US treasury yields benefited to the system s long exposure, while short term funds were hurt by their short Eurozone duration as rates also decreased in the region. The currency bucket posted positive results across the board. The systems benefited from the appreciation of the USD, mostly against the EUR, JPY, and AUD. Currencies were the strongest detractor over the month and these gains mitigated month-to-date losses. Commodity positions also returned positively, especially given the short exposure to agriculturals, posting gains on the sell-offs of coffee and sugar especially. GLOBAL MACRO WTD* MTD YTD Global Macro 1.5% 1.4% 4.5% EUR GBP AUD CAD CHF JPY Other Macro managers also gained on long USD (Net Exposure on currencies vs USD, % NAV) Mar-15 May-15-2% -15% -1% -5% % 5% 1% Long USD proved rewarding For the second consecutive week macro managers posted positive returns. Recent deep-in-the-black performance completely offset month-to-date negative results, bringing May s performance in positive territory despite the turbulent first weeks of the month. In line with the USD gain over the week, the currency bucket was the strongest driver of performance. Short EUR, and to a lesser extent short AUD, GBP and CAD contributed to gains. Positive returns on short BRL and TRY, as well as losses on long MXN exposure were witnessed in emerging currencies. Returns were also positive within the rates universe, with the significant decrease in US treasury yields rewarding long exposure to US fixed-income. Commodities experienced a volatile week with the main event being the 11% drop in coffee price, which proved strongly detrimental to commodity specialists. The sell-off in sugar price added to losses. Equities also hurt performance. Gains in Asia and in Japan partly offset the sell-off in European and US equities. Equally weighted. Source: Lyxor AM

4 L/S EQUITY Fuelled by Asian managers WTD* MTD YTD L/S equity managers ended the week slightly positive. This hides a wide dispersion between managers, with a L/S Equity Broad Index.2% 1.% 5.1% range of returns from -1.28% to 4.86%. Long Bias.7% 1.9% 1.4% Market Neutral.3% 1.5% 2.5% Variable Bias -.1%.3% 3.7% Not surprisingly, our Asian managers recorded the best returns for the week, with our China (+4.86%) and Pan Asia focused manager (+3.63%) leading the pack. In May managers have increased their longs on industrials (Net Exposure on sectors, % NAV) Consumers, Non-cyclical Consumers, Cyclical Financials Communications Industrials Government Technologies Basic Materials Utilities Diversified Energies Indices 21-Apr 19-May Funds -15% -1% -5% % 5% 1% 15% Most of our European managers finished the month on a positive note, especially our UK-focused fund which gained in home builders, entertainment and financial service industries. Turning to the US, all managers recorded negative returns, lagging the index for the week. In the multi-strategy camp, funds were flat to positive and grinded out performance from the relative value spread between longs in shorts while maintaining fairly tight sector neutrality. Over the course of the past month, we saw equity hedge managers meaningfully increase their net exposure to industrials, financials, technology, communication and consumer cyclical stocks. Equally weighted. Source: Lyxor AM EVENT DRIVEN TWC/Charter makes headlines WTD* MTD YTD The event driven funds took advantage of the continued consolidation in the cable industry. Event Diven Broad Index.3% 1.1% 4.2% Merger Arbitrage.4% 1.5% 4.7% As expected by some hedge fund managers, Charter Special Situations.2%.7% 3.3% Communications found its way back to Time Warner Cable. In the wake of the Comcast s abandoned acquisition of TWC late last month, Charter announced Managers gained on their exposure on TWC's stock on May 26th a $78.7 billion cash-and-stock transaction to (Average exposure of the merger arbitragers on TWC's stock vs acquire TWC. The combined entity will be known as New TWC stock price) Charter and will form the second-largest cable operator in 8% 19 the United States behind Comcast. 7% 6% 5% 4% 3% 2% 1% Avg exposure of merger arbitrage funds on the Lyxor platform, % of NAV, LHS TWC stock price, USD, RHS % 12 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May In parallel, French media conglomerate Altice controlled by billionaire Patrick Drahi proposed a transaction valued at $9.1 billion to take over Suddenlink Communications and is allegedly also in talks with TWC about a deal. This could open up a new chapter of foreign companies attempting to make inroads in the United States. Buoyed by the sequence of events, share price of TWC traded up 16.2% over the course of the week. Both M&A and special situations managers were rewarded for holding on to TWC s stocks regardless of Comcast s retraction. Source: Lyxor AM

5 CB & VOL ARBITRAGE Strong returns in May WTD* MTD YTD Convertible arbitrageurs slightly gave up performances in the last week of May but remained one of the best Fixed Income Broad Index.% 1.6% 1.8% performing strategy in May up 1.5%. Convertible Arb -.4% 1.5% -1.1% 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, CB issuance picked up in May (CB issuance volume, in M$ ) The environment has not been particularly supportive of the asset class as Equity markets were down in both the U.S and in Europe, and credit spreads widened. As a result convertible bonds ended the week down on both sides of the Atlantic, with IG converts underperforming their HY peers. On the positive side we witnessed a new pick in convertible bonds implied volatility in the U.S, up by.49% (sub-ig). The primary markets also saw an upsurge on the last week of the month as $ 3.8 bn. fresh converts were issued. Overall after a rather disappointing month of April, with weak levels of new issuance, primary markets showed once again a renewed interest in the asset class. On the alternative side, funds were hurt by the general environment in the asset class as well as single name positions from U.S energy and industrial sectors, while exposure to financials managed to offset some losses. Source: Bloomberg L/S CREDIT ARBITRAGE Resilient in volatile markets WTD* MTD YTD Credit arbitrageurs returned negatively on the last week of May as the credit environment slightly deteriorated but Fixed Income Broad Index.% 1.6% 1.8% remained positive in May. However once again the L/S Credit Arb -.2%.6% 1.% downward trend on rates counterbalanced the spread widening. HY kept outperforming IG YTD (HY v.s IG spread in Europe,OAS spread, bps) Europe HY -3.5xIG Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Source: Bloomberg In Europe credit spreads widened for both cash bonds and derivatives. European market volatility was once again driven by Greece s failure to reach agreement with its creditors to unlock bailout funds, while Britain s potential referendum on EU membership added to the uncertainty. In the U.S, investment grade bonds outperformed High Yield as oil prices and equity markets were down. However over the month High Yield bonds significantly outperformed I.G. peers on both sides of the Atlantic, supported by a higher demand coming from investors hunt for yield. On the Lyxor side, credit arbitrageurs were hurt by the spread widening in Europe and exposure to Greek bonds. In May, our Asian managers posted strong returns on the back of a positive environment in Asian markets and the recovery of the real estate sector. US managers also recovered over the month, gaining on High Yield positions in consumer and industrial sectors.

6 METHODOLOGY Breakdown of AUM by strategy Multi-Strategy CB, L/S Credit, Fixed Income Arbitrage L/S Equity CTAs - Approximately 8 funds in the platform - USD 7.7 billion of assets under management (as of April 28, 215) - Replicating USD 2 billion of AUM Event Driven & Risk Arb. Global Macro Lyxor Hedge Fund Indices Based on the complete range of funds available on the Lyxor Managed Account Platform, a universe of funds eligible for inclusion in the indices is defined on a monthly basis taking into account the following elements: - Investability Threshold: to be included in any index, the managed account must have at least $3 million of AuM. - Capacity Constraints: All index components must possess adequate capacity to allow for smooth index replication in the context of a regular increase in investments. - Index Construction: for each index, the relative weightings of the component funds are computed on an asset-weighted basis as adjusted by the relevant capacity factors. - Each Lyxor Hedge Fund Index is reviewed and rebalanced on a monthly basis. - The Index construction methodology has been designed to mitigate well-known measurement biases. Inclusions and exclusions of new Hedge Funds do not impact the historical index track record.

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