Cre

dit

CTA

/ M

anag

ed F

utu

res

Mu

lti-S

trat

egy

Em

erg

ing

Mar

kets

Eq

uity

Eve

nt

Dri

ven

Dis

tres

sed

Fixe

d In

com

e

All

Fun

ds

CB

& V

ol A

rb

Mar

ket

Neu

tral

Mac

ro

Eq

uity

L/S

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

75th Median Average 25th MSCI World

For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com

May 2014Executive summary*

Deutsche Bank Research Highlights: “US Equity Insights: Can yields stay cool this summer as growth heats up?”, “Global Economic Perspectives: Japan’s expectations gap,” and “Focus Europe: Buying time”In our first research piece, the US Equity Insights team explains that the key to S&P performance is how five and ten year treasury yields react to acceleration and predicts 5-6% EPS growth through at least 2016. The team presents three reasons to wait for a dip while watching treasury yields this summer. Next, the Global Economic Perspectives team examines the widening gap between investor expectations and Bank of Japan expectations about the success of BOJ’s reflationary policy. The team concludes that the BOJ is unlikely to make significant further easing moves any time soon. Finally, the Focus Europe team discusses the EBA’s macro scenario for the 2014 euro area stress test finding that non-performing loans, pre-provision profits and risk-weighted assets will be key drivers of the stress test, but it is unlikely that the results will generate material and widespread capital needs. Investor Sentiment The Capital Introductions team met with allocators in Germany finding that sentiment towards hedge funds remains cautiously optimistic and investors are mainly looking for discretionary macro and fixed income relative value strategies. In the US, institutional allocators, as well as family offices and fund of funds, are generally maintaining allocations, but remain open to best ideas. Large hedge fund allocators in Australia have reaffirmed their commitment to hedge funds with several institutions growing their hedge fund specialist teams. PerformanceIt was a challenging month for hedge funds with the median fund flat (0.00%) over the period. There was an unusually wide dispersion of returns among equity long/short strategies in particular. Global gains in April were led by credit (+0.81%), CTA / managed futures (+0.51%) and multi-strategy funds (+0.42%). Regionally, credit strategies continue to perform well gaining 4.32% in the US and 3.10% in Europe YTD; however, Asia ex Japan l/s leads with gains of 0.29% YTD. LeverageThe MSCI World 30 day volatility decreased slightly by 0.53% over the month ending 28 April 2014. Both gross and net fundamental equity exposure increased last month ending at 2.70 (+6.21%) and 0.71 (+4.10%) respectively. Securities Lending Though another difficult month in the equities market, deal activity picked up substantially in April, especially in the pharmaceuticals sector, with offers for AstraZeneca Plc and Meda of particular notice. Merger activity was complemented by strong convertible issuance throughout the month. Recent tech-related IPO names saw strong short interest in April including Twitter, Japan Display Inc. and Hitachi Maxell. Regulatory In the US, the SEC announced its intention to examine around 25 funds over the next six months to review whether certain alternative mutual funds that follow riskier hedge-fund strategies are complying with leverage and liquidity rules. The SEC also issued a risk alert on cyber security and plans to examine more than 50 investment advisers and broker-dealers regarding their level of preparedness. In the UK, the FCA published survey results on the composition of the UK hedge fund industry finding that the UK’s top 20 firms control over 80% of AUM. In Europe, the EU rejected the UK’s legal challenge of the EU FTT and the EU Commission requested technical advice on the detailed rules of MiFID 2.

April 2014 Cumulative Median Performance by Strategy

Global performance

April 2014 Performance Dispersion

-1.81%

-1.51%

-0.80%

0.31%

1.11%

1.23%

1.27%

1.61%

1.76%

1.89%

2.57%

3.75%

4.14%

-1.00% 5.00%4.00%-2.00% 0.00% 1.00% 2.00% 3.00%

Market Neutral

Macro

Emerging Markets Equity

Multi-Strategy

CB & Vol Arb

Equity L/S

Fixed Income

Distressed

Credit

CTA / Managed Futures

Event Driven

MSCI World

All Funds

Source: Hedge Fund Intelligence (HFI), May 2014

Source: Hedge Fund Intelligence (HFI), May 2014

6 Time Voted No. 1 Prime BrokerGlobal Custodian Prime Brokerage Survey

2013, 2012, 2011, 2010, 2009, 2008

Marketing material - For institutional investors only

Markets Prime Finance Monthly Hedge Fund Trends

Deutsche Bank

Median

Credit 0.81% Fixed Income 0.04%

CTA / Managed Futures 0.51% All Funds 0.00%

Multi-Strategy 0.42% CB & Vol Arb -0.23%

Emerging Markets Equity 0.26% Market Neutral -0.49%

Event Driven 0.20% Macro -0.66%

Distressed 0.16% Equity L/S -1.00%

* This document contains extracts and opinions from various departments and business areas within Deutsche Bank, including extracts from Research Reports, as well as from external reports specifically referenced herein. It is not, however, a research piece and has been produced by a front office function. Also, please refer to the body of the document for a more detailed description of and proper references to the topics covered in the Executive Summary section.

2

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Monthly Hedge Fund Trends - Deutsche Bank Research Highlights

Marketing material - For institutional investors only

Deutsche Bank Research – US Equity Insights: Can yields stay cool this summer as growth heats up? 1

How 5 & 10yr treasury yields react to acceleration is key to S&P performanceS&P 2014 EPS is becoming more certain with the plausible scenarios now in a narrow $117-120 range vs. $114-122 several months ago. Beyond 2014, we and most investors expect 5-6% EPS growth through at least 2016. The key uncertainty is the fair PE and the most important related question is: What’s the normal interest rate? This summer should help clarify the new normal midcycle interest rates across the curve and their trajectory over the next few years. US GDP growth should be >3% this summer, ending the run of mid-year soft patches and possibly opening the door to a longer period of ~3% growth. If the 10yr treasury yield can stay under 3.25% this summer against the backdrop of stronger growth, it is unlikely that it will exceed 4% through 2015. This improved clarity on low yields through the cycle should put the S&P 500 on path to 2000 within 12-months.

1Q EPS better than feared: Final EPS likely up ~3% y/y on ~2% sales growthAfter a weak start, earnings reports improved during the week of 25 April with good beats across sectors. Weighted EPS beat is now 4.0% for the S&P and 4.6% ex. Financials, a much needed improvement from barely positive beats previously. S&P 1Q bottom-up EPS climbed to $27.21 from $26.58 last week and is on track to reach our $27.50. Trimming of analysts’ estimates also slowed. Bottom-up 2014 EPS climbed to $119.00 from $118.30. ISM and payrolls during the last week of April provide the first glimpse of 2Q activity. But, a sharp ramp in growth is already expected in estimates. Our bottom-up EPS of $119 for 2014 requires remaining three quarters to average 10% y/y growth.

Three reasons to wait for a dip while watching treasury yields this summer1) PE > history: S&P trailing PE at 17 is ~5% higher than its avg. since

1960 and expected long-term EPS growth is in-line with history. Some low PE mega-caps are still attractive, but median PE at 18 is ~10% higher than its avg. and is dependent on low interest rates persisting through the cycle.

2) Higher interest rate volatility: Since 1966, the 10yr treasury yield increased by 50bps or more in 3 months at least once every year. In 2013, the 10yr jumped by 100bps during the taper tizzy. Interest rate volatility is likely to be higher this summer if the acceleration changes Fed guidance or investor expectations on the trajectory of the Fed Funds rate.

3) Summer lull increases during mid-term election years: Ex recession years S&P on avg. gains 3.9% from Jan-Apr, 0.9% from May-Sept and 4.4% from Oct-Dec. During mid-term election years, on avg. May-Sept is weaker with decline of 6.4% and Oct-Dec stronger with avg. gain of 6.7%.

Deutsche Bank Research – Global Economic Perspectives: Japan’s expectations gap 2

— The gap between investor expectations and Bank of Japan expectations about the success of the BOJ’s reflationary policy seems to be widening.

— The general expectation among investors, especially those outside of Japan, is that substantial additional monetary policy stimulus, including further substantial yen depreciation, will be needed if the BOJ is to succeed in its mission to slay deflation and return inflation to 2% on a sustained basis.

— The view within the BOJ is that the economy is close to settling into a virtuous cycle of wage and price inflation that will be self-sustaining without the help of further yen depreciation or monetary stimulus.

— We see substantial merit in the BOJ’s view based on both hard data and anecdotal information pointing to the disappearance of slack in an increasingly tight labor market and the evident closing of the output gap.

— The spell of zero wage inflation has been broken, and both price inflation and inflation expectations have risen impressively. More progress is needed in these areas, but the prospects look favorable as growth stands a good chance to remain comfortably above potential in the period ahead after a temporary tax-induced drop in the current quarter. Indeed, the early returns suggest the negative tax effects may be smaller than feared.

— These developments imply that the BOJ is unlikely to make significant further easing moves any time soon beyond a clarification of their forward guidance.

Output gap and core inflation, 1990-2013

Deutsche Bank Research – Focus Europe: Buying time 3

Having elevated expectations over the last several weeks, ECB President Draghi appeared to dial down the rhetoric during the final week of April making policy action seem less imminent. Our expectation is that the ECB makes no changes to policy in May. The latest inflation print was broadly in line with expectations and showed a rise from the April lows, the growth recovery is continuing to gather pace and the ECB remains confident that money market strains can be contained without intervention. Rhetoric should remain dovish and the options open, in our opinion, buying the ECB some time.

On 29 April the EBA published the macro scenario for the 2014 stress test. Overall the adverse scenario in the 2014 stress test is more severe than that in the 2011 exercise. We show that the treatment of three key building blocks – non-performing loans, pre-provision profits, risk-weighted assets – will be key drivers of the results of the stress test. Overall, it appears highly unlikely that the stress test will generate material and widespread capital needs.

The euro area inflation outlook remains highly uncertain, but on balance recent trends in leading indicators as well as in spot inflation seem consistent with expectations for some stabilization in inflation. That said, we would expect inflation to remain at low levels for now as food inflation could slow further in the near term (but is projected to rise again into 2015) and any recovery in core inflation is likely to be slow, not least given subdued trends in costs.

We review the experience of the 10 Central and Eastern European economies that joined the EU 10 years ago and think about what lies ahead. The strong integration into the European supply chains seems set to prevail. Strong financial integration also bodes well for growth. Long-term growth hinges on further productivity increases and the CEE-10 seem well equipped for an additional push towards more knowledge-intensive production and innovation.

A tougher but manageable stress test

1 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/1660-06F8/9687024/0900b8c0882e60bd.pdf2 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/1509-F2DE/7256351/DB_GEP_2014-04-

25_0900b8c088266689.pdf3 http://pull.db-gmresearch.com/cgi-bin/pull/DocPull/3793-420E/27941292/DB_FocusEurope_2014-05-

02_0900b8c08838b588.pdf

Source: Bank of Japan, Haver Analytics and Deutsche Bank Research

Source: Deutsche Bank

-4

-2

0

2

4

-10

-8

-6

-4

-2

0

2

4

6

8

90 94 98 02 06 10 14

%y/y%Output gap (ls) Core CPI (ex fresh food) inflation (rs)

0

5

10

15

20

25

30

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Non performing loans andsovereign shock (NPLs)

NPLs + Pre-provision profits (PPP)

NPLs + PPP + risk weighted assets (RWA)

Illustrative total capital needs for euro-area banks as function of shocks

EUR bn % of GDP

3

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Monthly Hedge Fund Trends - Investor Sentiment 4

Marketing material - For institutional investors only

US pensions and endowments re-assess US exposure levelsThough portfolio turnover has been relatively low thus far in 2014, allocators in the US pension and endowment community continue to seek best ideas. Some have commented that they are concerned that the US is “overheated,” and as many are tactically overweight US they may start to decrease exposure slightly. A direct result has been the evaluation of other potential regions in which to invest. Indeed several US allocators have started to put capital to work in Europe over the last 6-9 months.

US family offices and fund of funds maintain allocationsSimilar to their institutional counterparts, family offices and funds of funds have not shown interest in rebalancing lately, though they are always open to best ideas across the capital structure. We have found that many of these investors are overweight equities, with no immediate plans to significantly reduce that exposure or re-allocate. Europe is also becoming more of a focus for this investor base.

Frankfurt-based investors tentatively looking at alternatives for diversificationA trip to Frankfurt this month revealed that sentiment towards hedge funds amongst local investors remains cautiously optimistic. The low yield environment, coupled with volatile equity markets, has forced allocators to start to look at fixed income replacement and portfolio diversification. To that point, a few funds did reveal that they had received new UCITS mandates from local pension funds, who are moving into hedge funds for the first time since 2008. In terms of strategies, those most frequently requested were discretionary macro and fixed income relative value.

UK pension funds pleased with current hedge fund investmentsUK private pension funds that invest directly into hedge funds are largely fully allocated within their portfolio, which contains an average of 10 to 15 investments. Strategy preferences vary significantly amongst the key players, and tend to depend on the maturity of their hedge fund portfolio. Those who have been investing for some time are more focused on fixed income replacement, credit managers, as well as taking opportunistic approach to best ideas in other strategies. On the other hand, those who are in the process of ramping up their hedge fund portfolios are more focused on diversifying away from their long only equity and fixed income exposure. As a result they are focused on multi-strategy, CTA and macro managers. Despite the strategy differences, the common theme here is that they are pleased with the hedge fund portfolio and are not actively seeking to replace managers. That said we expect that they will add best ideas on a very opportunistic basis this year. Mandate activity from the UK public pension funds remains quiet thus far in 2014.

Australian allocators evaluate returns and liquidity structuresAustralian institutional investors continue to evaluate their hedge fund allocations, particularly to macro and CTA strategies, as returns have underperformed expectations over the past few years. Liquidity in the retail superannuation space has become less of an issue with most large wealth management firms creating quarterly liquidity structures to receive allocations from their balanced/growth funds.

Australia hires hedge fund specialistsAustralia’s largest hedge fund investor, The Future Fund, showed a decline in the allocation to alternative assets in its latest quarterly update; however, it has proved its commitment to the sector by bringing on two new hires during the quarter, including the former head of hedge fund strategies from US pension fund, Calpers5. Towers Watson, one of the larger consultants present in Australia, also hired a hedge fund specialist this quarter helping to grow local expertise in the sector.

4 From Deutsche Bank’s Hedge Fund Capital Group5 http://www.futurefund.gov.au/__data/assets/pdf_file/0008/5975/2014_April_Portfolio_update_to_

Mar_2014_A353218.pdf

4

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Monthly Hedge Fund Trends - Performance

Marketing material - For institutional investors only

Americas

2014 Year to date median performance

Europe

2014 Year to date median performance

Asia

2014 Year to date median performance

Americas

April 2014 Performance dispersion of returns

Europe

April 2014 Performance dispersion of returns

Asia

April 2014 Performance dispersion of returns

Cre

dit

CTA

/ M

anag

ed F

utu

res

Mu

lti-S

trat

egy

Fixe

d In

com

e

All

Fun

ds

Eve

nt

Dri

ven

US

L/S

Dis

tres

sed

Mac

ro

Glo

bal

L/S

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

75th Median Average 25th S&P 500

Source: Hedge Fund Intelligence (HFI), May 2014

Cre

dit

CTA

/ M

anag

ed F

utu

res

Eve

nt

Dri

ven

Mu

lti-S

trat

egy

Em

erg

ing

Mar

kets

Eq

uity

All

Fun

ds

Fixe

d In

com

e

Mac

ro

Mar

ket

Neu

tral

Glo

bal

L/S

Eu

rop

ean

L/S

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

75th Median Average 25th Stoxx 600

Source: Hedge Fund Intelligence (HFI), May 2014

Mu

lti-S

trat

egy

Asi

a ex

-Jap

an L

/S

Mac

ro

Jap

an L

/S

P

an-A

sia

L/S

All

Fun

ds

Ch

ina

L/S

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

75th Median Average 25th MSCI AsiaPac incl Japan

Source: Hedge Fund Intelligence (HFI), May 2014

3.31%

4.32%

2.75%

2.28%

2.07%

2.21%

1.93%

1.72%

-1.01%

-1.52%

1.00% 2.00% 4.00% 5.00%3.00%0.00%-1.00%-2.00%

Distressed

2.97%

Credit

Fixed Income

CTA / ManagedFutures

Global L/S

All Funds

Multi-Strategy

Event Driven

S&P 500

US L/S

Macro

Source: Hedge Fund Intelligence (HFI), May 2014

-2.44%

-1.77%

-1.09%

-0.06%

0.21%

0.60%

0.84%

0.98%

1.28%

2.93%

3.10%

3.28%

-3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00%

CTA / Managed Futures

Market Neutral

Emerging Markets Equity

All Funds

Fixed Income

Event Driven

Stoxx 600

Multi-Strategy

Macro

Credit

Global L/S

European L/S

Source: Hedge Fund Intelligence (HFI), May 2014

-5.02%

-3.00%

-2.84%

-2.28%

-1.90%

-0.86%

-0.47%

0.29%

-2.00%-3.00%-4.00%-5.00%-6.00% -1.00% 0.00% 1.00%

China L/S

MSCI AsiaPac incl Japan

Pan-Asia L/S

Multi-Strategy

Macro

Japan L/S

All Funds

Asia ex-Japan L/S

Source: Hedge Fund Intelligence (HFI), May 2014

5

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Monthly Hedge Fund Trends - Leverage 6

Marketing material - For institutional investors only

Global — The MSCI World 30 day volatility decreased slightly by 0.53% over the month ending 28 April 2014. Both gross and net fundamental equity

exposure increased last month ending at 2.70 (+6.21%) and 0.71 (+4.10%) respectively.

— The percentage of funds in the lowest leverage range (-1 - -0.25) and highest leverage range (1.25 – 1.75) has decreased since February 2014. In contrast, the percentage of funds in the middle range (0 – 0.75) has increased since February while the upper middle range (0.75 - 1) decreased over the same time period.

Global net & gross equity leverage vs. volatility

Global – April 2014 Quarterly change in net equity leverage distribution across funds

2.8

2.4

0.0

0.8

3.0

2.6

2.2

2.0

0.4

0.2

1.0

0.6

16

12

8

4

0

14

10

6

2

Apr 13May 13

Jun 13Jul 13

Aug 13Sep 13

Oct 13Nov 13

Jan 14Feb 14

Mar 14Apr 14

Dec 13

MSCI World 30d Vol

MC

SI W

orl

d 3

0 d

ay H

isto

rica

l Vol

Leve

rag

e

Gross Leverage Net Leverage

Source: Deutsche Bank Global Prime Finance Risk, May 2014

0%

2%

4%

6%

8%

14%

16%

18%

20%

10%

12%

-1 - -0.75

-0.75 - -0.5

-0.5 - -0.25

-0.25 - 00 - 0

.25

0.25 - 0.5

0.5 - 0.75

0.75 - 11 - 1

.25

1.25 - 1.5

1.5 - 1.75

1.75 - 2

01 May 14

% o

f fu

nd

s (D

euts

che

Ban

k)

01 Feb 14

Source: Deutsche Bank Global Prime Finance Risk, May 2014

6 Deutsche Bank Global Prime Finance Risk, May 2014

6

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Monthly Hedge Fund Trends - Securities Lending

Marketing material - For institutional investors only

Global 7

US % short interest sector change - April 2014

Equities market continues to fluctuate April proved another difficult month in the equities market as indices dropped sharply in the first half of the month and recovered in the second, denying investors the chance to identify any persistent trends. First quarter earnings season provided a few positive surprises including Norwegian-based chemical company, Yara, and datacenter provider, Telecity Group, two names with a meaningful short base that saw early price reaction which may have been indicative of a minor squeeze.

Merger revival in EuropeOn 7 April, global cement companies Lafarge and Holcim announced their intention to undertake a $50 billion merger with Holcim as the acquirer.8 As the merger arbitrage spread traded fairly narrowly, the market secured borrow in the target reflecting the deal’s long timeline and antitrust risk. Later in the month, four major potential deals made headlines: 1) Siemens expressed interest in a counter-proposal to GE’s bid for

Alstom’s power businesses, which is valued at $13 billion;9

2) Following a wave of consolidation in the generic drug industry, US generic-drug maker, Mylan, submitted a revised proposal to Swedish pharmaceutical producer, Meda, offering almost $7 billion. After rejecting the offer, Meda’s stock fell to its lowest in almost three years.10

3) Another US drug maker, Pfizer, proposed buying British pharmaceutical company, AstraZeneca Plc, for $98.7 billion, but was rejected.11

4) Premier Oil rejected two proposed merger deals from Ophir, which valued the combined company at almost $5 billion.12

Of the four, the Alstom and AstraZeneca situations have the most potential to develop into live deals.

Strong convertible issuance in AprilConvertible bond issuance in April was strong, with Gruppo L’Espresso,13 Vastned,14 LEG Immobilien,15 Sacyr16 and Marine Harvest17 raising a combined €1,300 million. Espresso and Sacyr both trade at 3% - 4%, with demand to hedge the convertible bonds further depleting already tight borrow situations. Other major capital raisings last month include RSA raising $1.3 billion to repair its balance sheet,18 Banco Popolare raising €1,500 million for similar reasons,19 and Intu Properties raising £500 million of growth capital.20

First quarter earnings a downward catalyst for TwitterIn reaction to its latest earnings report, Twitter, Inc. has traded down to its lowest level since its IPO. Into the earnings announcement, rates were inside of 9%, but have since traded as high as the mid-teens in reaction to the stock move.21 Forthcoming trading will determine whether this is a knee-jerk reaction by lenders that will normalize or an indication of a significant upward trend in rates. We estimate approximately 49 million shares of short interest, representing over 43% of the free float. Given the deterioration in stock price, long sales could further exasperate an already tight borrow dynamic and continue this trend in rates (Twitter has traded above 40% in the relatively recent past). Finally, we anticipate an impending lock-up expiry in early May that could significantly aid borrow liquidity.

7 This material has been produced by the Deutsche Bank Securities Lending Group and must not be regarded as research or investment advice.

8 http://online.wsj.com/articles/holcim-first-quarter-profit-falls-57-13986628099 http://uk.reuters.com/article/2014/04/29/uk-alstom-offer-idUKKBN0DF1562014042910 http://www.bloomberg.com/news/2014-04-28/mylan-s-second-offer-for-swedish-drugmaker-meda-is-

rejected.html11 http://www.bloomberg.com/news/2014-04-28/pfizer-confirms-proposing-98-7-billion-astrazeneca-deal.

html12 http://uk.reuters.com/article/2014/04/27/uk-premier-oil-ophir-idUKBREA3Q0842014042713 http://www.reuters.com/finance/stocks/ESPI.MI/key-developments/article/295888314 http://www.vastned.com/Upload/launch%20ENG.pdf15 http://www.reuters.com/article/2014/04/07/legimmobilien-brief-idUSWEB00L952014040716 http://www.morningstar.com/topics/t/90695007/update-1-spain-s-sacyr-to-sell-convertible-bonds-

shares.htm17 http://www.marineharvest.com/en/investor1/Share-info/Convertible-bond/18 http://dealbook.nytimes.com/2014/03/25/insurer-rsa-to-issue-shares-to-raise-1-27-billion/?_php=true&_

type=blogs&_r=019 http://www.bancopopolare.it/media/sites/2/2014_04_30-Disclosure-on-new-share-capital-position.pdf20 http://uk.reuters.com/article/2014/03/20/intu-prop-newissue-acquisitions-idUKL6N0MH2W32014032021 http://www.forbes.com/sites/steveschaefer/2014/04/29/tough-tuesday-for-growth-chasers-twitter-

noodles-tumble-after-earnings/22 http://nysepost.com/yingli-green-energy-hold-co-ltd-adr-nyseyge-stock-decreases-by-12-80-8455523 http://www.bbc.co.uk/news/business-2718418524 http://www.bloomberg.com/news/2014-04-28/japan-display-falls-to-lowest-since-ipo-after-forecast-

miss-1-.html25 http://online.wsj.com/article/BT-CO-20140319-703587.html

Europe % short interest sector change - April 2014

Slow improvement amongst expensive Chinese ADRsYingli Green Energy Holding Co. and NQ Mobile Inc., both Chinese ADRs, were of particular focus throughout April as borrow rates reached extreme levels. Borrow liquidity in Yingli Green Energy Holding Co. has been frozen for some time as rates reached 99% and persisted. On 23 April, the company announced an issuance of 25 million additional ADRs, settling 30 April.22 We anticipate significant easing as recent covers and new borrow supply will likely depress rates significantly. NQ Mobile Inc. traded as high as 99% briefly last month as recall pressure and borrow demand reacted to a 34% price drop in less than a week. A covering trend and stock returning to lending programs from long sales have contributed to recent easing. We foresee rates inside of 30% going forward.

Japanese consumption tax increases After the release of US employment data in the beginning of April, Japanese equity markets continued to decline during the month. The consumption tax was raised from 5% to 8% on 1 April leading to a year on year decline in sales for the retail sector; however, exporters have reported an increase in earnings with the impact from the tax increase within expectations.23 In additional to first quarter earnings, situations that may impact the market include changes to the investment committee and allocation targets of the $1.26 trillion Government Pension Investment Fund and the potential reduction of corporation tax.

Recent IPO names in Japan gain short interest quicklyJapan Display Inc., a screen supplier for handheld devices, gained short interest throughout April as its price fell more than 25% since its IPO in mid-March due to declining demand for product in the fourth quarter of 2013.24 Another recent IPO, Hitachi Maxell, saw its stock price fall over 8%. Hotel and railway operator, Seibu Holdings Inc. listed in mid-April, but gained short interest quickly as many thought the $7 billion valuation too high; however, stock advanced 13%.25

Japan considers easing consumer-lending ratesAfter a newspaper report on the potential for easing of consumer-lending rates, consumer finance companies, Aiful Corporation and Acom, saw a jump in short interest. Borrow liquidity slightly eased after the government announced that there are no immediate plans.

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Industrials

Cons Discr

Utilities

Materials

Energy

Financials

Telecom

Info Tech

Cons Staples

Health Care

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Utilities

Energy

Cons Disc.

Healthcare

Industrials

Info Tech

Materials

Telecom

Financials

Cons Staples

Source: Markit Group Limited & Deutsche Bank, May 2014 Source: Markit Group Limited & Deutsche Bank, May 2014

7

For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com

Monthly Hedge Fund Trends - Regulatory 26

Marketing material - For institutional investors only

SEC focuses on mutual funds’ leverage and liquidity rulesAccording to comments made by Jane Jarcho, an Associate Director at the SEC examination program, the SEC intends to examine around 25 funds over the next six months to review whether certain alternative mutual funds that follow riskier hedge-fund strategies are complying with leverage and liquidity rules. The SEC also said that they want to see if the Boards of the funds have the appropriate oversight function in place. The SEC will look at non-traditional bond funds, long-short equity funds, multi-alternative funds and market-neutral funds. The announcement follows reports in the press earlier this month that the SEC plans to add additional headcount to its examinations divisions for the purpose of looking at how private equity and hedge funds value their assets, disclose their fees and communicate with investors.

SEC issues risk alert on cyber security preparednessOn 15 April, the SEC issued a risk alert regarding the SEC’s initiative to assess cyber security preparedness and threats in the securities industry, including examinations of more than 50 investment advisers and broker-dealers. SEC registered advisors are required to review the alert, assess their current level of preparedness for cyber security threats, and consider whether any changes need to be made to their current policies and procedures. As part of the exercise, the SEC may request information about cyber security governance, identification and assessment of risks, network protection, vendor and third party risk and experiences of dealing with cyber security threats.

Bank of England Director speaks about policy issuesIn a speech delivered to the London Business School, Andrew Haldane, a Director of Financial Stability at the Bank of England spoke about regulatory policy issues for asset management including ‘too big to fail’ and the potential for amplification of pro-cyclical price swings. He referenced the debate about the treatment of globally systemically important non-bank financial institutions. The Financial Stability Board is finalizing a methodology to identify these entities, which could include asset managers, to potentially subject them to enhanced supervisory oversight and other policy measures. In the US, non-bank institutions designated as systemically important by the Financial Stability Oversight Council (FSOC) under Dodd-Frank will be subject to regular stress tests, capital requirements and a requirement to write living wills, but the FSOC has yet to announce which asset managers will be in scope of this requirement.

FCA publishes results of their annual “Hedge Fund Survey” – spotlight on highly leveraged funds using derivatives 27

In line with its remit and rules, the FCA expects hedge funds to monitor their portfolio and manage risks appropriately. In addition to oversight of individual funds and firms, the FCA will also monitor wider systemic risks.

The survey shows: — the UK’s top 20 firms control over 80% of AUM,

— the UK represents nearly 20% of total global hedge fund AUM,

— institutional investors represent 42% of ownership with HNW declining significantly,

— the Cayman islands still dominate other jurisdictions with two thirds of funds by domicile,

— gross leverage of funds has increased from 54x fund assets in March 2013 to 64x fund assets in March 2014 (measured as a ratio of gross notional exposure to NAV).

EU rejects UK legal challenge of the EU FTTThe European Court of Justice (ECJ) ruled against the UK’s legal challenge to the decision by 11 EU Member States (EU-11) to adopt the Financial Transaction Tax (FTT) using an enhanced cooperation procedure. This was widely expected and comes as the EU-11 attempt to reach political agreement on the FTT by EU elections in late May. On 6 May, 10 EU Member States reiterated their commitment to the introduction of a financial transaction tax, agreeing to take a “progressive” approach to implementation, starting with equities and “some derivatives” from 1 January 2016. The commitment leaves open the question of what derivatives might be captured in the first phase of implementation, what the timetable for future phases would look like, whether the tax would be based on issuance or residency of counterparty and whether there would be any intermediary reliefs within the final proposal. Negotiations between participating Member States to try and reach agreement on these and other issues are expected to continue to the end of this year.

Updated UK guidance on FATCA 28

The UK HMRC published updated guidance clarifying that UK investment managers which are foreign financial institutions (FFIs) solely due to their their investment management activities (and who do not act as custodial institutions) will be treated as Certified Deemed Compliant FFIs which do not need to register with the IRS. The next updated guidance from HMRC is due in August.

CFTC issues extension of no-action relief on oral recording requirements for CTAs On 25 April, the CFTC issued a time-limited no-action letter providing relief for asset managers that are members of designated contract markets (DCMs) or swap execution facilities (SEFs), from the requirement to maintain records of all oral communications provided or received in connection with the execution of a swap transaction. The no-action relief will expire on 31 December 2014.

Fed announces extension for Volcker CLO compliance under the Volcker Rule On 7 April, the Federal Reserve Board (Fed) announced that banks will be given a two-year extension to bring their ownership interests in, and sponsorship of, certain collateralised loan obligations (CLOs) into compliance with the Volcker rule, until 21 July 2017. Only CLOs that were in place on 31 December, 2013, and which do not qualify for exclusion under the final rule, are eligible. Banks would not have to include ownership interests in CLOs to determine its investment limits under the final rule, and would not be required to deduct CLO investments from Tier 1 capital until the end of the extended period. The House of Representatives also approved a bill that would exempt from the rules any CLOs issued before 31 January, 2014. The bill also needs to pass through the Senate before becoming law.

ESMA consultation paper on MiFID 2 expected soon 29 The European Commission published the request for advice that it sent to the European Securities and Markets Authority (ESMA) for delegated acts under the updated Markets in Financial Instruments Directive and Regulation (MIFID II / MIFIR). ESMA is expected to begin consulting on its advice, alongside a consultation on the issues it is directly responsible for, in May or June and will deliver it to the Commission soon after. This will cover all aspects of MiFID 2 including pre and post transparency for bonds and derivatives, mandatory venue trading of certain products and automated trading. All of the technical rules developed by either the EU Commission or ESMA will likely be finalised during the course of 2015, ahead of implementation near the end of 2016.

ESMA proposes EMIR rules on margin for non cleared derivatives 30 The European Supervisory Authorities (ESAs) launched a consultation on EU margining requirements for non-cleared derivatives. The draft rules follow the global standards agreed by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO), which left implementation of the rules to local regulators. Under the draft EU rules, counterparties with a gross notional OTC derivatives exposure over a certain size (€8 billion) must mandatorily exchange initial margin for non-cleared derivatives and variation margin will become compulsory for all transactions, including FX swaps and forwards. The draft EU rules set down procedures for calculating and segregating initial margin as well as proposing diversification requirements and concentration limits for collateral exchanged. The requirements will come into force on 1 December, 2015 although the rules on the exchange of initial margin will be phased-in by counterparty size over four years.

26 This is a summary of some of the themes underlying recent regulatory developments affecting hedge funds and their managers. It does not purport to be legal or regulatory advice and must not be relied on for that purpose. Deutsche Bank is not acting and does not purport to act in any way as your advisor. We therefore strongly suggest that you seek your own independent advice in relation to any legal, tax, accounting and regulatory issues relating to the merits or otherwise of the products and services discussed.

27 http://www.fca.org.uk/static/documents/hedge-fund-survey.pdf28 AIMA Weekly News, 29 April 201429 http://ec.europa.eu/internal_market/securities/docs/isd/mifid/140423-esma-request_en.pdf30 http://www.esma.europa.eu/system/files/jc_cp_2014_03_cp_on_risk_mitigation_for_otc_derivatives.pdf

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form

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Ab

bre

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AIF

– A

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men

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nd

AIF

MD

– A

ltern

ativ

e In

vest

men

t Fu

nd

Man

ager

s D

irec

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CB

RC

– C

hin

a B

anki

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Reg

ula

tory

Com

mis

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CC

P -

Cen

tral

Cle

arin

g C

ounte

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DS

– C

red

it D

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lt S

wap

CFT

C –

Com

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Trad

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Com

mis

sion

CR

A –

Cre

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Rat

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CR

D –

Cap

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ts D

irec

tive

CS

D –

Cen

tral

Sec

uri

ties

Dep

osito

ries

EB

A –

Euro

pea

n B

anki

ng

Auth

ority

EC

– E

uro

pea

n C

omm

issi

onE

CO

N –

Eco

nom

ic &

Mon

etar

y A

ffai

rs C

omm

ittee

EIO

PA –

Euro

pea

n In

sura

nce

and

Occ

up

atio

nal

Pe

nsi

ons

Auth

ority

EP

– E

uro

pea

n P

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men

tE

MIR

– E

uro

pea

n M

arke

t In

fras

truct

ure

Reg

ula

tion

ES

MA

– E

uro

pea

n S

ecuri

ties

Mar

ket

Auth

ority

EU

– E

uro

pea

n U

nio

nFA

TCA

– F

orei

gn A

ccou

nt

Tax

Com

plia

nce

Act

FDIC

– F

eder

al D

epos

it In

sura

nce

Cor

por

atio

nFF

Is –

For

eig

n F

inan

cial

Inst

itutio

ns

FSB

– F

inan

cial

Sta

bili

ty B

oard

FFI –

For

eig

n F

inan

cial

Inst

itutio

nFT

T –

Finan

cial

Tra

nsa

ctio

n T

axH

FT –

Hig

h f

req

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rad

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IRS

– In

tere

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Sw

apJF

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– J

apan

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Finan

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Ser

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gen

cyM

AR

– M

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t A

buse

Reg

ula

tion

MiF

ID –

Mar

kets

in F

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cial

Inst

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ents

Dir

ectiv

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– M

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Sw

ap P

artic

ipan

tO

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– O

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of

the

Com

ptr

olle

r of

the

Curr

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PR

IPs

– Pa

ckag

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etai

l Inv

estm

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Pro

duct

s

RR

D –

EU

Rec

over

y an

d R

esol

utio

n D

irec

tive

SFC

– S

ecuri

ties

and

Futu

res

Com

mis

sion

SE

C –

Sec

uri

ties

and

Exc

han

ge

Com

mis

sion

SE

F –

Sw

ap e

xecu

tion f

acili

tyS

EPA

– S

ing

le E

uro

Pay

men

ts A

rea

SIF

I – S

yste

mat

ical

ly Im

por

tant

Finan

cial

Inst

itutio

nS

SM

– S

ing

le S

up

ervi

sory

Mec

han

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TD

– T

ransp

aren

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irec

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UC

ITS

– U

nd

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king

s fo

r C

olle

ctiv

e In

vest

men

t in

Tr

ansf

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ecuri

ties

FTT:

EU

Cou

ncil

aim

to a

gree

un

anim

ousl

y (0

5/20

14)

Bas

el II

I: LC

R

intr

oduce

d a

t 60

%

of li

quid

ity n

eed

s (0

1/01

/201

5)

EM

IR: E

U

mar

gin

ing

re

quir

emen

ts

for

non

-cle

ared

d

eriv

ativ

es

com

e in

to f

orce

(0

1/12

/201

5)

SS

M: E

xpec

ted

to

b

e fu

lly o

per

atio

nal

(0

7/20

14)

FATC

A

with

hol

din

g o

n

fore

ign p

asst

hru

p

aym

ents

(0

1/01

/201

7)

FATC

A: I

RS

to

pub

lish li

st

of r

egis

tran

ts

(06/

2014

)FA

TCA

: Nex

t up

dat

e on

g

uid

ance

for

UK

FA

TCA

exp

ecte

d

from

HM

RC

(0

8/20

14)

No-

actio

n r

elie

f ex

pir

es f

or

oral

rec

ord

ing

re

quir

emen

ts

for

CTA

s (3

1/12

/201

4)

FATC

A:

Sp

onso

ring

en

titie

s m

ust

b

e re

gis

tere

d

with

the

IRS

to

ob

tain

thei

r G

IIN

(31/

12/2

014)

FATC

A: I

RS

tak

es

a sn

apsh

ot o

f re

gis

tran

ts t

o d

ate

to b

e p

ub

lished

in

June

(5/5

/201

4)

FATC

A: N

ew

sub

scri

ptio

n

pro

ced

ure

s an

d

doc

um

enta

tion f

or

new

inve

stor

s in

to

fund

s, a

nd

new

cl

ients

at

finan

cial

in

stitu

tions.

W

ithhol

din

g

app

lies

only

to

non

-IG

A c

ountr

ies

(01/

07/2

014)

Up

dat

ed M

arke

t A

buse

Dir

ectiv

e to

b

e im

ple

men

ted

(Q

4 20

15)

AIF

MD

: End

of

tran

sitio

n p

erio

d,

AIF

MD

tak

es e

ffec

t (2

2/07

/14)

MiF

ID 2

: ES

MA

to

d

eliv

er c

onsu

ltatio

n

on d

etai

led

rule

s to

EU

Com

mis

sion

(Q

3/20

14)

AIF

MD

: Dea

dlin

e fo

r non

-EU

AIF

Ms

to fi

le a

pp

licat

ion

w

ith C

zech

R

epub

lic r

egula

tor

(23/

06/1

4)

MiF

ID 2

: P

rop

osed

dat

e th

at M

iFID

2

will

com

e in

to

forc

e (H

2 20

16)

MiF

ID 2

: ES

MA

to

co

nsu

lt on

det

aile

d

rule

s (Q

2/20

14)

Sw

iss

CIS

O

Mar

ketin

g

and

Man

ager

re

gis

trat

ion:

Dea

dlin

e to

reg

iste

r w

ith F

INM

A

(02/

2015

)U

CIT

S V

: Pot

entia

l im

ple

men

tatio

n

dat

e (Q

4 20

15)

AIF

MD

: Mar

ketin

g

pas

spor

t fo

r non

-E

U A

ltern

ativ

e In

vest

men

t Fu

nd

s (a

t ea

rlie

st).

(22/

07/2

015)

Dea

dlin

e fo

r b

anks

to

con

form

to

th

e V

olck

er R

ule

(2

1/07

/201

4)

OC

C: D

ead

line

to

com

ply

with

sw

aps

push

out

rule

(0

7/20

15)

Vol

cker

Rule

: R

epor

ting

of

pos

ition

s b

egin

s (0

6/20

14)

EM

IR: T

+2

sett

lem

ent

for

tran

sact

ions

cond

uct

ed o

n

trad

ing

ven

ues

and

cl

eare

d b

y C

CP

s b

egin

s (0

1/01

/201

5)

2014

2015

2016

2017

9

For further information on any of the issues discussed in this newsletter, please contact the Markets Prime Finance team: email: MPF.Trends@list.db.com

Monthly Hedge Fund Trends

Marketing material - For institutional investors only

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