Tail hedging solutions for uncertain timesJ.P. Morgan Alternative Asset Management

September 2011

As a result of this, we have recently witnessed increased demand for protection and a profusion of “tail-hedging” products, which may present challenges to potential investors looking to build a hedging program. At JPMAAM we believe that investors should carefully understand the risk factors when they try to hedge their portfolios and consider the merits of such tail hedging techniques, taking into account considerations such as cost, timing/possibility of monetization and possible ‘crowding’ effect in tail hedges.

The emphasis of this paper is to discuss the main consider-ations investors should take into account before engaging in a tail hedging program. We will then spend some time focusing on the different tail hedge alternatives available to investors, with their respective pros and cons. We will conclude with JPMAAM’s new hedging approach as well as potential institu-tional implications.

A number of recent market events have highlighted the costly impact that improbable or highly unlikely events can have on investors’ portfolios. The credit crisis in the United States in 2008, the failure of financial counterparties such as Lehman Brothers in the same year, as well as the debt crisis in Europe and the associated political risk more recently have prompted investors to seek ways to protect their portfolios against negative tail events, particularly those that occur on the far left of the return distribution.

Tail hedging solutions for uncertain times

2 | Tail hedging solutions for uncertain times

Rationale for tail hedging and considerationsWe believe it is important for investors to understand the different risk factors embedded in their portfolio and the sensitivity of their portfolio to different risks, such as equity, credit, rates, etc. The traditional approach of purchasing put options on indices (e.g. S&P 500) to protect against the occurrence of a dramatic event has some important limitations. Today there is an increasing number of investors, spooked by the events of 2008–2009, who have flocked to options as a way to hedge the tail. This has created high demand for puts, resulting in a steady increase in price. As of September 2011, for example, a 15% out-of-the-money put option on the S&P 500 index expiring one year from today would cost a little over 6%, a premium implying a break-even rate of over 21%, which is very expensive by historical standards and could be far beyond what many rational investors would be ready to pay. At JPMAAM, instead of buying a series of out of the money put options on indices, we more appropriately analyse and disaggregate our portfolios on a risk factor basis and we try to hedge out these specific risks.

It is important for investors to understand the different charac-teristics of each of the different hedging techniques available to them: return profiles, attachment points, convexity and negative carry. Attachment points are the level at which protection starts “kicking in”. For example, options have different strike prices implying different levels of protection. The convexity of a hedge is also a crucial concept for investors to grasp. Protection can either be linear or convex. For example, in a linear protection scenario, if the market is up +10% you could reasonably expect your hedge to lose -10% and if the market is down -10% you can reasonably expect your hedge to be positive approximately +10%. In a convex tail hedging strategy you can expect your hedge to be increasingly effective as the market sells off. For example a sell-off of -10% could generate a return of +60% and

a sell-off of -15% could generate a return of +150%. Negative carry is another important consideration for investors. Negative carry is the cost associated with hedging techniques. For exam-ple, option based strategies have a negative carry which repre-sents the time-decay of the option.

Basis risk is another factor investors should consider before engaging in a hedging program. Basis risk is the risk of a hedge not working, i.e. it is the risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position. For example an investor may realize that it is less costly to hedge a long position in IBM by buying a put option on the entire S&P 500 (as opposed to sourcing the spe-cific IBM stock to borrow and short it). This strategy, although less costly, presents serious flaws as there is no guarantee for the IBM stock to move in tandem with the S&P 500. So chang-ing the basis of the underlying hedge may result in a hedge that is not as efficient as initially anticipated.

The alpha component of a hedging strategy is another important factor to consider. Some hedging strategies - such as buying and selling options opportunistically and monetizing these options, or some idiosyncratic short credit strategies – can offer alpha and have the potential to outperform naïve index replication.

The capital efficiency of a hedging technique is another key consideration for investors. Some hedging strategies, such as short selling are “capital intensive” meaning investors have to deploy USD 100 to get USD 100 of notional exposure. Option related strategies on the other hand are more capital efficient due to the implicit leverage embedded in option contracts. The more capital efficient a strategy, the less capital needs to be deployed to reach a certain level of notional exposure or pro-tection. This reduces the “cash drag” on the portfolio, enabling capital to be deployed more effectively towards other, poten-tially higher yielding investments.

A consideration which is often overlooked by investors is the ability to monetize mark-to-market gains. Hedge fund manag-ers specializing in option trading have the ability to monetize mark to market gains through a number of different tech-niques. Examples of monetization techniques include:

• Selling actual put positions that have accrued value

• Not rolling into new positions over the course of the month

• Covering a portion or all of the position’s short delta

Portfolio risk sensitivity Equity, credit, rates, etc.

Sizing approach Insurance budget vs. target level of protection

Return profile Attachment point, convexity, negative carry

Basis risk Risk of hedging failing to provide expected protection

Alpha Potential to outperform native index replication

Capital efficiency Reducing “cash drag”

Liquidity Ability to monetize mark-to-market gains

Counterparty risk Over-the-counter vs exchange exposure

Transparency Ability to monitor investment

J.P. Morgan Asset Management | 3

The first option, although theoretically feasible, is the most difficult to implement in practice and its viability ultimately hinges on the manager’s percentage of the open interest and the width of bid/ask spread. The third solution which consists of covering a portion or all of the position’s short delta by buying a call option on the wider equity market is really the most tenable short term actionable option as it can be accomplished in the deep and liquid S&P futures market. The manager could also cover the position’s short equity exposure by buying call options, but this strategy is not risk free as it could lose money in a scenario in which the market continues to fall, but implied volatility comes in. This is particularly true if the manager is too aggressive in covering their short delta without also selling some of their options positions.

Counterparty risk (over-the-counter vs. exchange exposure) and transparency are important factors to take into account when analyzing the riskiness of hedging programs. Entering into over-the-counter transactions could leave investors exposed to credit risk of their counterparty in case of default and transparency is key to enable the monitoring of the investors’ investments and net exposure to risk factors.

Tail hedge alternativesThere are a number of tail hedging alternatives available for investors who seek to protect themselves against negative tail events, particularly those occurring at the far left of a return distribution. We have classified these in passive (index), bespoke/customized structures and active hedging strategies.

Passive (index) type of hedging strategies offer potentially lower expenses via internal implementation and has the added benefit of full transparency. On the other hand though, the “fire and forget” strategy and the limited ability for dynamic management are clear limitations for the strategy. For example, an investor may start a hedging program with a view to protect the portfolio against a given level of equity market sell-off and buy a put option which is 15% out of the money. Let’s assume that markets rally by 15% subsequently to the purchase of the hedge. The investor following a passive hedging strategy now holds a put option which is 30% out of the money instead of the initial 15% out of the money, which may offer a level of protection less than the one offered by an active hedging strategy which would continuously roll the hedge. In addition to this, a generic hedging strategy has the added drawback of high basis risk, due to the fact that in most instances the individual risk factors in the portfolio or securities are hedged with broad indices or sector hedges as opposed to individual hedges. The other pitfall of the strategy

is the lack of alpha potential insofar as there is a limited possibility for monetization. An example of monetization could potentially consist of selling an option that has increased in value to realize the mark to market gain and lock in the profit. The buy and hold nature of the strategy does not allow for such active management.

Bespoke/customized structures offer a number of advantages compared to passive hedging. The basis risk - or the risk of a hedge failing - is reduced due to the tighter hedge and the costs are easily quantifiable. The limitations of this approach are the poor liquidity and limited monetization ability as these would require sourcing potential buyers of protection during periods of stress and during periods of wide bid/ask spreads. In addition the bespoke nature of the approach tends to render the strategy expensive and the investor is exposed to significant counterparty risk.

Active hedging strategies offer the benefit of outsourcing portions of the hedge to experts specific to each asset class. Such experts utilize a network of dealers and are attuned to asset class specific order flow information, allowing for the generation of alpha through security selection, dynamic portfolio management, and transactional efficiencies. This active management approach also tends to offer more continuous protection via dynamic portfolio rebalancing. The disadvantage for investors is the reduced control over the day to day hedging program. The table below summarizes the key pros and cons of the different hedging strategies.

Source: J.P. Morgan Alternative Asset Management. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.

Pros Cons

Passive (index)

Potentially lower expenses via Internal implementation

“Fire and forget” strategy—limited ability for dynamic management

Full transparency No alpha potential

Bespoke/customized structure

Minimum basis risk Poor liquidity, monetization ability

Easily quantifiable cost/protection comparison

Expensive

Counterparty risk

Active

Expert management specific to asset class

Less control

Potential for alpha through security selection

More continuous protection via dynamic rebalancing

Tail hedging solutions for uncertain times

4 | Tail hedging solutions for uncertain times

high yield bonds, and credit indices. Given the tightness of credit spreads, the protection offered by shorting these credits can be quite convex. For example, investment grade credit spreads currently around 110bps can only go to 0 (historically, investment grade has bottomed out around the 30 level), but could potentially move to 300 or higher in periods of market stress and dislocation. The potential asymmetry of returns to the upside in case of a market shock or a left tail event makes this strategy extremely compelling.

One of the key differentiator in our approach to portfolio hedging is the dynamic mix between convex and linear hedg-ing strategies. We believe that combining convex and linear hedging program offers an attractive payout for our investors. The reason for this is that convex payout profiles tend to offer greater capital efficiency and protection in severe tail events, i.e. when “it hurts the most” whilst linear hedging strategies smooth out the distribution of returns. In addition, mixing these different hedging strategies provides us with the flexibil-ity to change the mix depending on individual client situations, embedded risk factors or utility functions. For example, inves-tors may require different attachment points (i.e. threshold at which protection is triggered) to protect against different extreme scenarios or different levels of stress in the markets. The combination of convex and linear protections help us achieve these desired levels of protection while smoothing the distribution of returns in the left shoulder and belly of the dis-tribution as depicted in the graph below.

JPMAAM’s approach to active portfolio hedging

JPMAAM’s approach to portfolio hedging places a premium on strategies which:

• Utilize asset class specialists

• Focus primarily upon equity (but also credit) sensitivity

• Offer convex, including out-of-the money hedges

• Add linear protection to smooth distribution

• Minimize basis and counterparty risk

• Focus on capital efficiency

We believe it is generally in the investors’ interest to outsource the construction of optimal hedges to experts specific to each asset class. For example, within the option arbitrage bucket we have carried out due diligence on and selected managers who have over a decade of experience not just in trading equity options, but in specifically crafting positive convex tail positions through equity options. These managers’ reputation and stand-ing as a first call liquidity provider for desks and brokers with downside options to lay-off allows for significant transactional inefficiencies. Especially in very short dated out-of-the money options, bid-ask spreads can be quite wide as a percentage of premium expended; the ability to transact at mid market (or bet-ter) can therefore prove highly advantageous. The managers’ expertise and flexibility to optimize the hedge along the term structure can also be quite valuable. For example, the ability to trade shorter-dated options can prove particularly cost-effective during periods of an upward sloping implied volatility curve. And in addition to being more cost effective, shorter term options are also more liquid and potentially easier to monetize in a crisis.

On the equity and credit protection side, we tend to employ specialists who have proven experience in shorting stocks and credit managers who have a long and demonstrable experi-ence in shorting credit. At JPMAAM we avoid generic hedging strategies and prefer to employ managers who have an exper-tise in their own field. For example, well diversified short sell-ers can add alpha on their short positions by selecting individ-ual, idiosyncratic stocks which are likely to underperform the broader market. This strategy is very different than more generic hedging strategies which tend to short the broader market or sectors and thus offer negative beta (which is dif-ferent than alpha). On the credit side we tend to favour short credit managers that invest predominantly through credit default swap (CDS) protection on investment grade bonds,

Source: J.P. Morgan Alternative Asset Management, Bloomberg. Financial information is as of April 2011. Combo Hedge represents approximately 22% Option Arbitrage, 44% Short Equity and 33% Short Credit. Please see “Important Notes” in the back of this presentation for more information. The above charts are for illustrative and discussion purposes only. Payoff profiles are based on forward looking projections and manager positioning. Actual results can vary significantly based on factors such as market volatility, implied volatility skew and credit spreads.

TARGETED PAYOFF PROFILES FOR GIVEN EQUITY MARKET RETURNS

Targeted payoff by strategy Targeted payoff: A closer look at the “tradeoff”

Hed

ge s

trat

egy

retu

rn (%

)

S&P 500 Monthly Return (%) S&P 500 Monthly Return (%)

Hed

ge s

trat

egy

retu

rn (%

)

Option Arbitrage Short Equity Short Credit Combo Hedge

-100

0

100

200

300

400

-20 -15 -10 -5 0 5 10-10

-5

5

10

15

20

0

-4 -2 0 2 4 6

J.P. Morgan Asset Management | 5

JPMAAM’s approach focuses on minimizing basis risk (i.e. the risk of a hedge failing) and counterparty risk. We have a spe-cialized team within JPMAAM which specializes in analyzing and understanding the financing arrangements of the manag-ers with whom we invest. For example, the team analyzes International Swaps and Derivatives Association (“ISDA”) agreements between hedge funds and their counterparties to ensure proper robustness of terms. In today’s environment of declining liquidity and rising volatility, it is particularly impor-tant for hedge fund managers to obtain financing from the strongest counterparties. In addition, their agreements with these counterparties should offer competitive economic terms, should provide sufficient time and flexibility to manage through difficult periods, and should not place the fund and fund investors at undue risk. Managers who are proactive in negotiating for the best terms will often have an advantage, especially during the tougher times. They will have time to unwind certain positions if necessary, or equally as important, to take advantage of mispricings that surface in the capital markets by leveraging liquidity they have available that others may not. In addition, we want to ensure managers have con-trols in place to understand the strength of their counterpar-ties and have procedures in place to proactively move their counterparty exposure should their counterparties weaken to a level of concern.

Another key differentiator in our approach is our constant focus on capital efficiency. Capital efficiency is often overlooked by most investors. Highly capital efficient strategies like convex and option related strategies decrease the opportunity cost of hedge allocation and enable the deployment of capital to other, return seeking asset classes/investments.

The table below shows the core tenet of our investment strat-egy. Combining hedging strategies with different characteristics can help create an attractive hedging payout, which can be

customized depending on individual investors’ requirements in terms of underlying instrument traded, exposure to predefined risk factors, attachment points, efficiency of capital, potential for alpha generation and possibility of monetization. In addition combining different hedging strategies helps mitigate the risk of one strategy not working as efficiently as anticipated (e.g. short sellers in 2008 due to regulatory restrictions).

A last consideration of importance is liquidity. Liquidity allows investors to adjust the allocation and profile of the hedging program based on changing risk factors in the core portfolio. For example, if long short managers trim significantly their net exposure, one could reduce the allocation to the hedging program to maintain the desire level of risk across the portfolio.

Institutional application

JPMAAM’s tail hedging program could offer an attractive solution for investors who look to hedge their portfolio against a number of left tail risks, while providing at the same time an efficient use of their capital. The graph below plots the different level of monthly returns for the S&P 500 from January 1997 through April 2011 and the bars show the performance of the tail hedging portfolio during these months. For example, on the right hand side of the graph, there were 19 occurrences when the S&P 500 monthly returns were between 6% and 9% over the period, and the proforma Portfolio Hedge allocation returned an average monthly return of -3.3% during these months*. The blue line depicts the returns of an unhedged typical institutional portfolio (55% Equities, 40% Fixed Income, 5% Hedge Funds). The orange line depicts the returns of a proforma enhanced new hedged typical institutional portfolio with 2.25% Portfolio Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit). The difference between the blue line and the orange line shows the impact of the 2.25% Portfolio Hedge Allocation. The interesting observation is that the hedged

Source: J.P. Morgan Alternative Asset Management. The above information is for illustrative and discussion purposes only.

* Typical Institutional Portfolio represents 40% Barclays Aggregate Bond Index, 20% S&P 500, 20% MSCI AC World Index Ex U.S. (LCL currency), 15% Russell 2000 and 5% HFR Composite. HFR Composite reflects performance of HFRX Global Hedge Fund Index from April 2003 onwards and HFRI Fund Weighted Composite Index from January 1997 to March 2003. The MSCI AC World Index Ex U.S. (LCL currency) reflects performance of the MSCI AC World Index Ex U.S. (LCL currency) from February 1999 onwards and the MSCI World Index (LCL currency) prior to February 1999. Data presented from January 1997 through April 2011. Portfolios are rebalanced quarterly. Enhanced portfolio allocation to Portfolio Hedge is funded pro-rata from Institutional Portfolio allocations. Please see “Important Notes” in the back of this presentation for more information. The above charts are for illustrative and discussion purposes only. Past performance is not indicative of future results. Returns are proforma and have not been experienced by investors.

Option arbitrage Short credit

Short equity

JPMAAM’s approach blended portfolio

Main Instruments Traded

Equity options/VIX IC/HY CDS Equities Diversified

Attachment Point Far out-of-the-money

Moderately out-of-the

money

At-the-money Diversified

Payoff Profile Convexity High Moderate/

high Low Moderate

Capital Efficiency High Moderate Low ModerateTime Decay/Negative Carry Moderate High Moderate Moderate

Alpha Potential Moderate High High ModerateMonetization High Moderate Low Moderate

Tail hedging solutions for uncertain times

6 | Tail hedging solutions for uncertain times

portfolio only gives back a small portion of upside during positive equity markets but dramatically outperforms the unhedged portfolio during negative equity markets. Interestingly as well, the sharper the market decline, the greater the outperformance of the hedge portfolio. This is due to the highly convex nature of our Portfolio Hedge allocation. For example, the left hand side of the graph shows that there were two occurrences when the S&P 500 monthly returns were lower than -12% over the period, and the proforma portfolio hedge program returned a monthly average of +230.6%* during these months. As a consequence of this highly convex tail hedging strategy, the hedged portfolio outperforms the unhedged portfolio by nearly 600 bps on average during these months of market stress. It is the blending of linear (short sellers) and convex hedges (out of the money options and short credit strategies) that help us achieve this asymmetric return profile where the gains in the extreme negative tail events far outweigh the drag on performance during periods of benign equity markets.

The following graphs show the cumulative outperformance of the hedged portfolio against the unhedged portfolio over the January 1997-April 2011 period. The following graph (below right) shows the difference in rolling 12-month returns between the hedged and the non-hedged Institutional portfolios. The graph shows a net outperformance of the hedged portfolio during the Asia crisis/LTCM debacle in 1998, the 2001 tech wreck, the 9/11 terrorist attacks, the 2002 accounting scandals at Adelphia, Enron and WorldCom and the 2008 credit collapse.

Source: J.P. Morgan Alternative Asset Management, Bloomberg. Financial information is as of April 2011.

* Typical Institutional Portfolio represents 40% Barclays Aggregate Bond Index, 20% S&P 500, 20% MSCI AC World Index Ex U.S. (LCL currency), 15% Russell 2000 and 5% HFR Composite . HFR Composite reflects performance of HFRX Global Hedge Fund Index from April 2003 onwards and HFRI Fund Weighted Composite Index from January 1997 to March 2003. The MSCI AC World Index Ex U.S. (LCL currency) reflects performance of the MSCI AC World Index Ex U.S. (LCL currency) from February 1999 onwards and the MSCI World Index (LCL currency) prior to February 1999. Data presented from January 1997 through April 2011. Portfolios are rebalanced quarterly. Enhanced portfolio allocation to Portfolio Hedge is funded pro-rata from Institutional Portfolio allocations. Please see “Important Notes” in the back of this presentation for more information. The above charts are for illustrative and discussion purposes only. Past performance is not indicative of future results. Returns are proforma and have not been experienced by investors.

Source: J.P. Morgan Alternative Asset Management, Bloomberg. Financial information is as of April 2011.

Institutional unhedged portfolio-Typical Institutional Portfolio*: (55% Equities, 40% Fixed Income, 5% Hedge Funds)

Portfolio hedge

Enhanced new hedged portfolio-Typical Institutional Portfolio with 2.25% Portfolio Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit)

230.6

14.2 14.4 3.9 2.2-0.8 -5.3 -3.3 -8.5

-12

-8

-4

0

4

8

12

-250-200-150-100

-500

50100150200250

< -1

2%

Inst

itut

iona

l por

tfol

io a

nd

enha

nced

por

tfol

io r

etur

n (%

)

Port

folio

hed

ge r

etur

n (%

)

-12%

to -9

%

-9%

to -6

%

-6%

to -3

%

-3%

to 0

%

0%

to 3

%

3% to

6%

6% to

9% >9

%

(# occurences)

(2) (3) (12) (16) (31) (51) (34) (19) (2)

S&P 500 Index monthly return range

CUMULATIVE RETURN

020406080

100120140160180200

Jan-

97

Oct-

97

Jul-9

8

Apr-

99

Jan-

00

Oct-

00

Jul-0

1

Apr-

02

Jan-

03

Oct-

03

Jul-0

4

Apr-

05

Jan-

06

Oct-

06

Jul-0

7

Apr-

08

Jan-

09

Oct-

09

Jul-1

0

Apr-

11

Perc

ent

Ann. Return: 7.83% Ann. Vol: 8.19%

Ann. Return: 7.10% Ann. Vol: 9.39%

DIFFERENCE IN PERFORMANCE BETWEEN ENHANCED AND INSTITUTIONAL PORTFOLIOS

(rolling 12-month returns)

Institutional unhedged portfolio—Typical Institutional Portfolio*: (55% Equities, 40% Fixed Income, 5% Hedge Funds)

Enhanced new hedged portfolio—Typical Institutional Portfolio with 2.25% Portfolio Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit)

Enhanced Portfolio outperforms

-10-8-6-4-202468

10

Diff

eren

ce in

per

form

ance

bet

wee

n En

hanc

ed a

nd

Inst

itut

iona

l por

tfol

ios

(%)

Institutional Portfolio outperforms

Jan-

97

Oct

-97

Jul-

98

Apr

-99

Jan-

00

Oct

-00

Jul-

01

Apr

-02

Jan-

03

Oct

-03

Jul-

04

Apr

-05

Jan-

06

Oct

-06

Jul-

07

Apr

-08

Jan-

09

Oct

-09

Jul-

10

Apr

-11

Institutional unhedged portfolio—Typical Institutional Portfolio*: (55% Equities, 40% Fixed Income, 5% Hedge Funds)

Enhanced new hedged portfolio—Typical Institutional Portfolio with 2.25% Portfolio Hedge allocation (0.50% Short Equity, 1.25% Option Arbitrage, 0.50% Short Credit)

Enhanced Portfolio outperforms

-10-8-6-4-202468

10

Diff

eren

ce in

per

form

ance

bet

wee

n En

hanc

ed a

nd

Inst

itut

iona

l por

tfol

ios

(%)

Institutional Portfolio outperforms

Jan-

97

Oct

-97

Jul-

98

Apr

-99

Jan-

00

Oct

-00

Jul-

01

Apr

-02

Jan-

03

Oct

-03

Jul-

04

Apr

-05

Jan-

06

Oct

-06

Jul-

07

Apr

-08

Jan-

09

Oct

-09

Jul-

10

Apr

-11

J.P. Morgan Asset Management | 7

ConclusionAn increasing number of providers have recently launched tail hedge products. We believe JPMAAM’s approach of constructing a diversified hedge portfolio with different payouts is unique and offers a number of advantages. As demonstrated previously, the careful blending of linear and convex hedges helps create an asymmetric return distribution convex to tail events while limiting the drag on performance on the upside. Our focus on capital efficient hedging techniques means that less capital is needed to achieve a given level of protection, allowing investors to seek higher performing investments.

A well constructed portfolio hedge can help protect significant capital in market dislocations. This protection has a number of benefits: 1. It may allow investors to hold assets that have dislocated as opposed to selling these in an unfavorable market to raise liquidity in their portfolios. 2. It may allow investors to be offensive and reallocate their portfolios to undervalued assets during or after the dislocation. Most investors who experienced severe losses in 2008 were not in a position to take advantage of the dislocations in the market.

Finally, JPMAAM’s dynamic mix and flexibility to adjust weightings to different hedging strategies makes this approach extremely modular and can be tailored to individual portfolios, depending on investors’ exposure to given factor risks, their concerns about specific risks or their desired level of protection. For example, depending on an investor asset allocation, sensitivity to risk factors and level of protection needed, we would tend to over- or under-weight any of the below strategies:

1. Shorter duration, deep OTM equity and equity index puts

2. Dedicated equity short sellers

3. Credit protection fund

The bottom line is that we can help construct a tail hedging program that is geared towards specific risk factors (equity or credit related for example) and work together with the client to define the most appropriate attachment points given their risk aversion/views of market risks.

Tail hedging solutions for uncertain times

jpmorgan.com/institutional

IMPORTANT DISCLAIMER

Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Alternative Asset Management’s own at date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you. These materials have been provided to you for information purposes only and may not be relied upon by you in evaluating the merits of investing in any securities referred to herein. These materials are not intended as an offer or solicitation in any jurisdiction with respect to the purchase or sale of any security. Any investment decision should be made based solely upon the information contained in the final Offering or Information Memorandum.

These materials are strictly confidential, contain certain proprietary information and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person. These materials are not intended to constitute legal, tax or accounting advice or investment recommendations and clients should consult their own advisers on such matters. Past performance is not a guarantee of future results. The value of the investment may fall as well as rise and investors may get back less than they invested. Where securities are issued in a currency other than the investors’ currency of reference, changes in exchange rates may have an adverse effect on the value of the investment. Further information is available on request.

The opinions and views offered constitute JPMAAM’s best judgment, are based on the current market environment and can be changed without notice. JPMAAM believes the information provided is reliable but does not warrant its accuracy or completeness. The views and strategies described may not be suitable for all investors.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l., Issued in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency, in Australia by JPMorgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission and in the United States by J.P. Morgan Investment Management Inc. which is regu-lated by the Securities and Exchange Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

270 Park Avenue, New York, NY 10017

© 2011 JPMorgan Chase & Co.

CONTACTS

Pascal Bougiatiotis London: +44-207-742-2274

Calvin Ho, CFA Asia: +65-68821085

Raphael Guiragossian, CAIAGeneva: +41-22-744-1926

Douglas Smith, CFA New York: 212-648-2622