ALTERNATIVE PRODUCTS

philosophy

Alternative Products are designed to take advantage of Cutwater's deep credit expertise in spread sectors such as structured finance, by identifying attractive relative value and risk-adjusted opportunities across the breadth of the Asset Backed Securities (ABS) market. Current Alternative Product offerings include a Credit Opportunities strategy and a TALF (Term Asset Backed Securities Loan Facility) strategy.

The Credit Opportunities Strategy seeks to capitalize on the current credit and liquidity stress in the market affecting structured finance securities including residential and commercial mortgage-back securities, collateralized debt obligations and asset-backed securities to deliver high absolute and risk-adjusted returns primarily through capital appreciation over a three to five year investment horizon. This strategy primarily targets investments in the senior parts of securitization capital structures and seeks to invest opportunistically across a broad range of structured finance subsectors including sectors/securities that are performance-distressed or credit-impaired. While the strategy is primarily focused on U.S. structured finance securities, it does have flexibility to purchase non-U.S. structured products as well. The funds/portfolios may use leverage to enhance their returns, including leverage from the Federal Reserve Bank of New York's Term Asset-Backed Securities Loan Facility, and also may use derivatives (including credit derivatives) either for hedging or speculative purposes.

The TALF Strategy seeks to capitalize on the high yields currently available in high quality AAA-rated "TALF eligible" ABS coupled with attractive financing available through the TALF sponsored by the U.S. Treasury and Federal Reserve Bank of New York. This strategy seeks to deliver high current income and absolute returns over a three to five year investment horizon. The strategy uses a relatively high degree of leverage through borrowings under TALF within an expected range of 5x to 20x depending on each security's sector and tenor. The strategy also takes advantage of attractive terms offered on TALF financing which include non-recourse term leverage offered with a fixed funding spread and fixed haircut amount (i.e. the TALF financing has no mark-to-market or re-margining requirement). Given that this strategy restricts its investments to ABS eligible to be financed through TALF, the portfolios are relatively non-diversified (i.e. relatively high issuer and sector concentrations).