Professional Documents
Culture Documents
2005 – 2008
- May 2005 -
Investment Analytics
Company Description:
Postal Address:
Contact Details:
Telephone: 1-888-736-6650
Fax: 1-212-208-2492
Email: Info@investment-analytics.com
Web Site: www.investment-analytics.com
You are being furnished with confidential information that has been prepared by
Investment Analytics (Bermuda) Ltd. (The "Company"), and you may be furnished
with additional information by the Company or by its representatives or agents in
connection with evaluating a possible transaction with the Company. By your
acceptance and as a condition hereof, you agree to treat all information concerning the
Company which is furnished to you by or on behalf of the Company, whether furnished
before or after the date of this letter and regardless of the manner in which it is
furnished, together with analyses, studies or other documents or records prepared by
you or any of your employees or agents (collectively, "Representatives") to the extent
that such analyses, studies or documents contain or otherwise reflect or are generated
from such information (hereinafter collectively referred to as the "Evaluation
Material"), in accordance with the provisions of this agreement.
You hereby agree that the Evaluation Material will be used solely for purposes in
connection with a possible transaction with the Company, and that such information
will be kept permanently confidential by you and your Representatives and you will not
distribute this Evaluation Material or any part hereof to others at any time without the
prior written consent of the Company. You agree to restrain your Representatives from
prohibited or unauthorized disclosure or use of the Evaluation Material and shall be
responsible for any such breach hereof. This Evaluation Material is being delivered for
informational purposes and upon the express understanding that it will be used only
for the purposes set forth above. In the event that the possible transaction which is
the subject of this agreement is not completed or at the Company's request, you shall
promptly return to the Company all written material containing or reflecting any
information contained in the Evaluation Material and will not retain any copies,
extracts or other reproductions in whole or in part of such written material.
It is understood and agreed that money damages would not be a sufficient remedy for
any breach of this agreement and that Company shall be entitled to specific
performance and injunctive or other equitable relief as a remedy for any such breach.
In the event of litigation relating to this agreement, the prevailing party shall be
entitled to receive reasonable legal fees and costs incurred in connection with such
litigation. New York State law will govern the terms and conditions of this agreement.
Your retention of the Evaluation Material shall constitute acceptance of the terms and
conditions hereof. If you do not agree to the terms hereof, please do not read the
Evaluation Material and immediately return such to the Company. We would
nonetheless appreciate your kindly signing and returning one copy of this agreement,
which will constitute our agreement with respect to the subject matter hereof.
Dated : _____________
(Signature) _________________________________
PAGE
DISCLAIMER 3
CONFIDENTIALITY AGREEMENT 4
EXECUTIVE SUMMARY 6
BUSINESS CONCEPT 7
Business Overview 7
Company’s Mission 8
Opportunity/Value Proposition 8
Services Provided 9
Income Streams 12
The Economics of the Business 13
Business Objectives 15
MARKET RESEARCH & ANALYSIS 17
Industry Analysis 17
Independent Investment Research 18
Regulations 19
Market Overview 19
Market Size & Characteristics 20
Market Trends and Growth 24
Market Needs 27
Target Market 28
SWOT Analysis 29
Competitive Environment 30
MARKETING 31
Marketing Strategy & Tactics 31
OPERATIONS 33
MANAGEMENT TEAM 34
OVERALL SCHEDULE 36
RISKS 37
FUNDING AND USE OF PROCEEDS 38
FINANCIAL SUMMARY 39
EXIT STRATEGY 40
APPENDICES 41
community recently has been the explosion of capital within the WITH EXISTING $ 60.00
alternative fund space. With this increased profile, especially given HEDGING STRATEGIES
the participation of pension funds, the need for in-depth risk analysis $ 40.00
$-
THE SOLUTION Funding requirement: 2005 2006 2007 2008 2009
$ 2,000,000 USD
Investment Analytics recognizes the crucial need for innovative
and improved research techniques in the international investment
management industry and has developed a business model to profit 2005 2006 2007 2008 2009
from their unique, proprietary offering. Total Income $ 3.60 22.26 29.87 63.04 120.16
CONFIDENTIAL
This material has been produced in conjunction with The WorldGate Group and contains information which is protected by copyright
and other intellectual property law and is subject to the terms and conditions in the governing client contract.
BUSINESS CONCEPT
BUSINESS OVERVIEW
Investment Analytics recognizes the crucial need for innovative and improved
research techniques in the international investment management industry and has
developed a business model to profit from their unique, proprietary offering.
We develop custom research products for our clients based on our quantitative
research and developed specifically to complementing their existing strategies and
core holdings.
Our approach to consulting is typically highly quantitative and involves the application
of sophisticated mathematical and statistical models to simulate key features of
market behavior and strategy performance.
Our consultants are PhD mathematicians and investment managers with extensive
experience consulting to all genres of money management organizations.
OUR MISSION
Our success is based on delivering the best service to the investment management
community at a competitive rate.
Not only is our research methodology unique, so too is our approach. We work with
our clients’ research teams to create a research product that is distinctive, innovative
and more informative than any other available today.
Our products and services are based on advanced quantitative financial models
developed over many years of research effort.
Our proprietary volatility index and stochastic volatility models measure underlying
volatility and model its behavior more accurately and efficiently than traditional
methods. Using these models we are able to correctly anticipate the future direction
of volatility an average of 75% of the time in the universe of stocks and equity
indices we analyze, and identify regimes of unsustainably high or low levels of
volatility with a high degree of accuracy. Our stochastic option pricing models apply
these factors to detect options that are trading rich or cheap relative to fair value.
Together, these techniques enable us to select investment opportunities that offer
the greatest risk-reward trade-off, generating specific buy or sell recommendations
in selected stock and index options that are consistently profitable.
Our proprietary asset allocation methodology combines the volatility analytics with
elements of portfolio optimization and risk management theory to create optimal
portfolios capable of generating consistent, high returns, with minimal draw down,
Investment Analytics will build income and profits from its products and services.
Our main product is the Volatility Arbitrage Program.
The Volatility Arbitrage Program represents our main source of income, and
revenues are built from a Management Fee and a Performance Fee. Financial
projections are created using a Monte-Carlo simulation model in which strategy returns
follow random processes with expected average levels and standard deviations of
return as set out in the table below. The table also shows the management and
performance fees for each strategy. There are five strategies in the Volatility Arbitrage
Program.
The growth in Assets Under Management (AUM) is computed from a baseline scenario
as shown in the table below.
An additional source of income derives from our consulting services. In order to make
a projection we assumed a 10% from the Volatility Arbitrage Program to this stream.
Income Forecast
streams. $ 60.00
Income Statement
$ 40.00
year of operations we anticipate
$ 30.00
Break-even Analysis
$ 20.00
break even is achieved and
$-
sustained in the second year of 2005 2006 2007 2008 2009
operations.
Our business objectives and goals are based, in this first stage of expansion on
targeting the list of Financial Services companies detailed in Appendix 5. Our goal for
our first year is to sell two licenses for the Volatility Arbitrage Program.
Equities
STAGE 1 STAGE 2 STAGE 2 year of operations within the
2 Licenses 2 Licenses 2 Licenses
US Equity Volatility market
(Stage 1).
Once the expansion to the stated foreign markets has been achieved, Investment
Analytics will begin incorporating other asset areas into its horizon of products and
services. These additional asset categories will include currencies (Stage 3),
commodities (Stage 4), and fixed income products (Future Growth Stages).
This process will involve two to three months of research and development on the new
markets, and between six to nine months in the case of research and development of
new products. In both cases, there is a timeframe close to nine months for adapting
and modifying the business model to integrate effectively with the new markets and
product categories. The target penetration for each market segment would again be
two licenses.
Year
Year 2005
2005 2006
2006 2007
2007 2008
2008
Quarter
Quarter Q3
Q3 Q4
Q4 Q1
Q1 Q2
Q2 Q3
Q3 Q4
Q4 Q1
Q1 Q2
Q2 Q3
Q3 Q4
Q4 Q1
Q1 Q2
Q2 Q3
Q3 Q4
Q4
STAGE
STAGE11 -- US
US Equity
Equity Volatility
Volatility Market
Market
Research & Development
Research & Development
Equities
Equities--US
USMarket
Market
Technology
Technology Transfer
Transfer
Equities
Equities--US
USMarket
Market
22Licenses
Licenses
Implementation
Implementation
Equities
Equities--US
USMarket
Market
STAGE
STAGE22 --Expansion
Expansion to
to European
European and
and Asian
Asian Markets
Markets
Research
Research &&Development
Development
Equities
Equities--Europoean
EuropoeanMarket
Market
Equities
Equities--Asian
AsianMarket
Market
Technology
Technology Transfer
Transfer
Equities
Equities--Europoean
EuropoeanMarket
Market
Equities
Equities--Asian
AsianMarket
Market
44Licenses
Licenses
Implementation
Implementation
Equities
Equities--Europoean
EuropoeanMarket
Market
Equities
Equities--Asian
AsianMarket
Market
STAGE
STAGE33 --Expansion
Expansion to
to New
New Products
Products(( Currencies
Currencies)) in
in 33 Markets
Markets
Research
Research &&Development
Development
Currencies
Currencies--US
USMarket
Market
Currencies
Currencies--European/
European/Asian
AsianMarkets
Markets
Technology
Technology Transfer
Transfer
Currencies
Currencies--US
USMarket
Market
Currencies
Currencies--European/
European/Asian
AsianMarkets
Markets 66Licenses
Licenses
Implementation
Implementation
Currencies
Currencies--US
USMarket
Market
Currencies
Currencies--European/
European/Asian
AsianMarkets
Markets
STAGE
STAGE44 --Expansion
Expansion to
to New
New Products
Products(( Commodities
Commodities)) in
in 33 Markets
Markets
Research
Research &&Development
Development
Commodities
Commodities--US
USMarket
Market
Commodities
Commodities--European/
European/Asian
AsianMarkets
Markets
Technology
Technology Transfer
Transfer
Commodities
Commodities--US
USMarket
Market
Commodities
Commodities--European/
European/Asian
AsianMarkets
Markets 66Licenses
Licenses
Implementation
Implementation
Commodities
Commodities--US
USMarket
Market
Commodities
Commodities--European/
European/Asian
AsianMarkets
Markets
INDUSTRY OVERVIEW
The past decade has witnessed a dramatic increase in institutional investment in both
domestic and international investable assets. While most of this investment remains
dedicated to traditional stock and bond assets, an increasing portion has been invested
in various forms of alternative investment vehicles.
Over the past few weeks and mostly for geopolitical reasons, stock markets have
continued to decline and in the broad financial markets (especially in stocks and
commodities) volatility has remained extremely high. Fundamental economic
indicators provide an ambiguous picture. The (already lowered) corporate earnings
expectations in both the U.S. and Europe have mostly been met, but the quality of
earnings varies markedly.
Investor confidence has recently been shaken further by more cases of balance sheet
manipulation and the first signs of underfunding of corporate pension funds.
Fundamental company analysis has, therefore, become and will continue to be of
increased importance to investment performance. This is further supported by the
continuing weakness of the global economy. Aside from declining business investment,
Credit spreads are persisting at very high levels, another indicator of the high degree
of global market uncertainty. At the same time, interest rates have continued to fall,
and the bond rally has not yet come to an end. Moreover, there is a growing fear that
the next “bond correction” is just a matter of time. One reason these bearish investors
are citing is that governments on both sides of the Atlantic need to finance a rising
budget deficit which will lead to a surplus of government bonds. Furthermore, the
central banks have pumped huge amounts of liquidity into the financial system, adding
to the increased in likelihood of inflation. Persistently high commodity prices are also
pushing up the rate of inflation. As long as uncertainty persists in the financial
markets, precious metals will be seen as an attractive investment alternative. Another
cause for concern is the strong and rapid depreciation of the US dollar. It appears that
the Europeans and Asians have become less willing to continue financing the U.S.
deficit. The dollar therefore looks to be headed for continued weakness.
Market analysts believe that a convergence of market forces, regulatory changes, and
an economic resurgence is creating a tremendous opportunity for independent
research services. Wall Street’s admission of conflicts of interest in traditional research
has already established the need and demand for credible independent research.
Pending regulatory changes that will effect how institutional investors buy and pay for
research will also create major operating changes in the independent research market.
Provided the slow recovering stock market, the demand for proprietary research ideas
being delivered in a timely manner will only increase.
An explosion of new firms has jumped on the independent research bandwagon. They
see an opportunity in a large market to write and market research reports on
REGULATIONS
Hedge funds are currently not required to register with the SEC, or as investment
companies under US federal securities laws, because they generally only accept
financially sophisticated investors like professional fund mangers.
MARKET OVERVIEW
Alternative Investments
o The global fund of hedge funds (FOHFs) market is over $100 billion.
o FOHFs allocate about one-fifth of assets managed by hedge funds.
o FOHF growth is likely to remain strong. The market has grown at an annualized
rate of more than 40 percent over the last fourteen years and more than 30
percent since 1999. Despite a larger base and lower expected market
appreciation, strong growth is still likely, at least for the next few years.
o Sustained growth requires an advanced business model. Through the 1990s,
FOHFs have gained market share during bullish periods but their share has
fallen disproportionately during two downturns. To prevent such losses in the
future, FOHFs must deliver value in addition to simply being a conduit for hedge
fund investing. More advanced FOHFs must also excel at risk management,
portfolio construction, and client service.
o In a strong year for the broad markets, 2004 Annual Hennessee Hedge Fund
Manager Survey results indicate that the hedge fund industry grew 34% from
$592 billion to $795 billion.
o Growth was due to manager performance (20%) and new capital inflows
(14%).
o In addition, the number of hedge funds grew 23% from 5,700 to 7,000 funds.
$500
Assets (in $billions)
$400
$300
$200
$100
$0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sep-02
Source: Hedge Fund Research (HFR), “Industry Report Q3 2002”. See Appendix for a
description of the HFR database.
4000
Number of Funds
3000
2000
1000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Sep-
02
Source: Hedge Fund Research (HFR), “Industry Report Q3 2002”. See Appendix for a
description of the HFR database.
d
nte
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rma
erfo
Global Macro
P
Managed
Futures
ted
-o rien Long/Short
tion Equity
ifica
i vers
D Multi-Strategy
Arbitrage
Equity Market
Neutral
RETURN
RISK
Last year in the US a SEC roundtable identified some of the likely trends in the hedge
fund industry:
o The number of hedge funds, the size of their assets and the range of customers
will all increase, and the entrepreneurial management style will continue.
o Retailization through registered funds of hedge funds will increase. This will
increase the availability of hedge fund strategies to the public as investment
thresholds fall.
o Further work will be done by regulatory authorities regarding the type and level
of information made available by hedge funds to funds of hedge funds.
Projections of the current growth of investment in the hedge fund industry have
suggested some $2 trillion under management by 2010.
‘Rapid growth’ is, of course, a relative concept but among those who have put their
heads above the parapet to quantify this development is, Putnam Lovell. They
forecasted last year that cash under management by hedge fund managers would
grow by some 200% from mid-2003 to 2010 and that by 2010, total funds would have
risen to exceed two trillion dollars – a compound annual growth rate of some 17.5%.
Hedge funds have provided above average risk-adjusted returns compared to other
asset classes and investment styles
Sources: Venture Economics, TASS hedge fund database, Rosen Consulting Group, Lend Lease Real Estate
Investments; Boston Consulting Group; CAI analysis
CAGR (E) is Compound Annual Growth Rate (Estimated)
* Includes Managed Futures
o Alternative investment assets are expected to almost double over the next four
years
o Increasing Allocations: certain high net-worth clients, institutions and
endowments are increasing their allocations to Alternative Investments to as
much as 20–40% of assets under management
o Portfolio Diversification / Risk-Adjusted Returns:
seeks to achieve strong absolute and risk-adjusted performance
returns typically with low correlation to traditional asset classes
or to each other
o Access to Talented Investment Management:
many top managers of traditional investments migrating to AI
funds of funds provide access to previously unavailable top AI
managers
o Access to Products: greater access facilitated by development in product
structures, such as:
Increased transparency
Increased liquidity
Lower investment minimums
Customized portfolios
Risk management and due diligence in funds of funds
The following are the results of a recent survey in which investment consultants and
institutional investment managers participated:
1 Asset Management
1.a Hedge Fund Management Yes
1.b Institutional Asset Management Yes
1.c Mutual Fund Management Unlikely
2 Investment Banking
2.a Large-Market Investment Banking Yes
2.b Middle-Market Investment Banking Yes
2.c Small-Market Investment Banking No
3 Investment Firms
3.a Shareholder Services No
3.b Venture Capital No
4 Investment Funds Possibly
The following SWOT analysis captures the key strengths and weaknesses within the
company, and describes the opportunities and threats facing Investment Analytics.
S - Strengths W – Weaknesses
O – Opportunities T - Threats
As the majority of hedge funds performed A slump in the economy will constrict the
poorly in 2004, most of the players in the flow of money to enhancement services
alternative investment industry are looking like Investment Analytics’.
for ways to recalibrate their strategies.
The entrance of other risk management
The need for new and improved strategies service providers into this expanding
continues to be more critical, especially as market could increase competition.
funds seek to distinguish themselves.
The appearance of governmental status
The alternative investment industry is and regulations adverse to our business.
rapidly becoming mainstream.
In the case of new entrants, we feel that with the increase of investment capital to the
industry there will be a correlating increase of businesses trying to serve the
community. While the entry barriers to conducting world-class research and services
remain low, there is nonetheless a sizeable pool of newcomers that can be expect to
compete for the attractive profits. In fact, we anticipate the emergence of new
competitors within two years after our service is established.
In the case of substitute products, we feel a high threat because the market might be
attracted by substitutes that have comparable or better features and buyers switching
costs might be low. We anticipate the emergence of substitute products within 2 years
after our service is established.
MARKETING STRATEGY
Key Message
Marketing Pillars
1. Innovation
2. Scalability
3. Low Correlation with existing hedging strategies
As funds look to develop and recalibrate their strategies, conduct performance analysis
and assess and navigate risk exposure, it is imperative that they utilize the leading
tools, technology and expertise available. Investment Analytics is in the business of
providing precisely these solutions.
Marketing Tactics
Our marketing and sales tactics are based on referrals, industry networking and word
of mouth. We will conduct selected interviews with investment managers from our
target market (See Appendix 5). After several demonstrations we expect to sell two
licenses to our prospects in our first year of operations, and from there, expand to new
markets and products.
Operations for the company will be based initially in the US, followed by an additional
location in London that will coincide with expansion to the European market.
Mr. Kinlay has consulted with leading investment funds and financial
institutions in Europe and North America for over 20 years in the areas of
financial engineering, investment strategy, quantitative analysis and risk
management, initially with NatWest and Chase Manhattan banks and
subsequently as the head of quantitative analytics and proprietary trading
in a European hedge fund, where he traded US and European equities,
fixed income and OTC & exchange traded derivatives.
Mr. Kinlay was the founding partner of the hedge fund Caissa Capital and pioneered the
use of advanced econometric models in volatility arbitrage strategies. The models,
which provide the basis for the highly successful investment strategies used by Caissa
Capital, are made available by Investment Analytics under license. He is the
General Partner of the Proteom Fund, which offers sophisticated quantitative strategies
using proprietary, state-of-the-art bioengineering technologies developed by the
research partnership with Daytrends Inc. and Investment Analytics.
Jonathan Kinlay and Chris Rosevear initially worked together from 1983 to 1985 at
NatWest and subsequently on various consulting projects over the last 20 years.
The founders intend to hold 51% of the company. The remaining 49% will be available
to potential investors in exchange for investments.
For controlling the overall schedule of the project, we will use MS Office Product, in
order to project tasks, estimate budgets, and keep track of the project.
MAIN MILESTONES
From our detailed schedule, the main milestones before launching are shown in the
following table.
Milestone Date
Fund Raising Starts June 15th, 2005
Money Available August 31st, 2005
First Licensee US September 23rd, 2006
First Licensee Europe October 1st, 2007
First Licensee Asia October 1st, 2007
Exit via sale March 31st, 2015
We recognize and understand some risks associated with launching this new company
with regards to growth and operations.
START-UP COSTS
Start-up costs are primarily required to purchase the equipment needed to start
developing the operations, as well as cash back-up funds to support operations until
the company begins to cover its cost structure.
FUNDING REQUIREMENTS
The table below summarizes the funding requirements as well as the estimated use of
these funds.
Sources
Sourcesof ofFunds
Funds Uses
Usesof ofFunds
Funds
Founder's
Founder's invested
invested capital
capital 500,000
500,000 Operations
Operations && Service
Serviceproviders
providers 00
Start-up
Start-up Funding
Funding Equity
Equity 2,000,000
2,000,000 Equipment
Equipment ((Hard
Hard && Software
Software&& Data)
Data) 1,113,999
1,113,999
Loans
Loans 00 Salaries
Salaries 00
Marketing
Marketing promotion
promotion 00
Emergency
Emergencyback-up
back-up funds/cash
funds/cash 1,386,001
1,386,001
Total
Total Sources
Sources of
ofFunds
Funds $$ 2,500,000
2,500,000 Total
Total Uses
Uses of
of Funds
Funds $$ 2,500,000
2,500,000
Financing $ 2.50 - - - -
We have performed several financial simulations to support this model. We use Monte
Carlo simulations applied to the different strategies available in our Arbitrage Program.
The company anticipates either going public or being acquired by an industry player.
Should the exit strategy take the form of a strategic sale/ IPO in primary markets, the
time frame for market exit is approximately 6 years given the current market
conditions. We anticipate that Investment Analytics will be positioned for a liquidity
event in the year 2011.
It is more likely that existing risk management companies would pursue Investment
Analytics for its capabilities. Many firms who stand to benefit from the efficiencies
gained through Investment Analytics’ services would be equally interested in
intercepting this valuable offering from going into the hands of competitors. Moreover,
by combining Investment Analytics’ extensive market expertise, state-of-the-art
technology and risk management capabilities, firms could circumvent proprietary
investments in developing these capabilities.
VARIABLE COSTS
Marketing $ 0.65 $ 4.05 $ 5.43 $ 11.46 $ 21.85
Total Variable Costs $ 0.65 4.05 5.43 11.46 21.85
FIXED COSTS
Staff $ 2.73 4.20 5.68 7.15 8.63
Marketing $ 0.16 0.27 0.38 0.50 0.61
Service Providers $ 0.48 0.77 1.06 1.35 1.63
Operations $ 1.10 2.12 3.15 4.18 5.21
Total Fixed Costs $ 4.46 7.37 10.27 13.17 16.08
EBITDA $ (1.51) 10.85 14.17 38.41 82.24
Depreciations $ (0.22) $ (0.24) $ (0.25) $ (0.26) $ (0.27)
EBIT $ (1.29) 11.08 14.41 38.67 82.51
Interest $ - $ - $ - $ - $ -
EBT $ (1.29) 11.08 14.41 38.67 82.51
30% Taxes $ - 3.33 4.32 11.60 24.75
NET EARNINGS $ (1.29) 7.76 10.09 27.07 57.76
INVESTING
Non-Current Assets
Property & Equipment $ (1.11) (0.06) (0.06) (0.06) (0.07)
Start Up Costs $ - 0.00 0.00 0.00 0.00
Cashflow from Investing $ (1.11) (0.06) (0.06) (0.06) (0.07)
FINANCING
New Financing
Increase in Short-term Bank Borrowing $ - 0.00 0.00 0.00 0.00
Increase in Long-term Borrowing $ - 0.00 0.00 0.00 0.00
Founder's invested capital $ 0.50 0.00 0.00 0.00 0.00
Sale of Common Stock: $ 2.00 0.00 0.00 0.00 0.00
Reduction in Financing
Repayment of ST Borrowing $ - 0.00 0.00 0.00 0.00
Repayment of LT Debt $ - 0.00 0.00 0.00 0.00
Dividends $ - 0.00 0.00 0.00 0.00
Other Financing Transactions $ - 0.00 0.00 0.00 0.00
Cash Flow from Financing $ 2.50 0.00 0.00 0.00 0.00
Net Change in Cash $ 0.32 7.93 10.27 27.27 57.97
Cash, Beginning of Year $ - 0.32 8.25 18.52 45.79
Cash, End of Year $ 0.32 8.25 18.52 45.79 103.75
Long-Term Assets
Long Term Credit
Equipment + Amort. Start Ups $ 1.11 1.18 1.24 1.31 1.37
Less depreciations $ (0.22) (0.46) (0.71) (0.97) (1.24)
Total Long Term Assets $ 0.89 0.72 0.54 0.34 0.13
Total Assets $ 1.21 8.97 19.06 46.13 103.88
LIABILIES & SHAREHOLDER'S EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ - 0.00 0.00 0.00 0.00
Bank Loans Payable $ - 0.00 0.00 0.00 0.00
Long Term Debt
Long Term Debt $ - 0.00 0.00 0.00 0.00
Total Liabilities $ - 0.00 0.00 0.00 0.00
SHAREHOLDER'S EQUITY
Founder's invested capital $ 0.50 $ 0.50 $ 0.50 $ 0.50 $ 0.50
Additional paid-in capital $ 2.00 2.00 2.00 2.00 2.00
Total Liabilities and Shareholder's Equity $ 1.21 8.97 19.06 46.13 103.88
Return Expectations
The following are the results of a 2003 survey in which participated 250 plan sponsors, investment
consultants, individual financial advisors, and investment managers:
Financial Services
1. Asset Management
o Andor Capital Management has been recognized as 2003 Hedge Fund Leader of the
Year not only for its stellar performance but also for being out in front of a growing
trend to institutionalize its business structure.
o The long/short equity specialist, with roughly $9.6 billion under management, has
taken steps to tie its managers and operations officials tighter to the firm.
o Last year it launched sector and non-tech hedge funds that served the dual purpose of
diversifying its lineup beyond its technology focus and offering some of its analysts the
chance to become portfolio managers.
o Bank of Bermuda has net assets of $10.4 billion and $80 billion in assets under
administration.
o Bank of Bermuda has a family of mutual funds and over $4 billion under management
covering the equity, bond, alternative and cash asset classes.
o Bank of Bermuda’s top performing flagship investment vehicle, All Points Multi-Manager
plc ("APMM"), has surpassed the $1 billion funds under management milestone.
o Bear Stearns Asset Management (BSAM), a subsidiary of Bear Stearns, provides equity
and fixed-income investment management services, as well as hedge funds.
o Its private equity funds focus on biotechnology and digital media companies. BSAM also
administers The Bear Stearns Funds, a family of about a dozen mutual funds.
o The firm has more than $30 billion of assets under management, most of it on behalf of
corporate clients.
o The Bessemer Group manages more than $40 billion in assets for wealthy individuals
and families.
o Main subsidiary Bessemer Trust administers portfolios with holdings in domestic and
international equities and bonds, as well as such alternative assets as hedge funds, real
estate, and private equity funds of funds
BlackRock, Inc.
40 East 52nd Street New York,
New York 10022-5911
Tel: 212.810.5560
Fax: 212 935 1370
www.blackrock.com
o CI Fund Management Inc. ("CI") reported that at January 31 2005, had fee-earning
assets of $68.1 billion
o Total fee-earning assets consisted of managed assets of $47.2 billion and
administered/other assets of $20.9 billion. Managed assets included investment fund
assets at CI Mutual Funds Inc. and Assante Wealth Management of $45.9 billion,
labour-sponsored funds of $175 million and structured products and closed-end funds
of $1.1 billion.
o Administered/other assets included institutional assets of $4.5 billion at BPI Global
Asset Management LLP and $15.7 billion in assets at Assante and IQON Financial
Management Inc. net of assets under management at Assante.
o Citadel, which has some $10 billion in assets under management, has expanded its
derivatives operations. It recently announced plans to make markets in equity options
on the Pacific Exchange (PCX).
o Citadel also makes markets on the International Securities Exchange, the Boston
Options Exchange and the Chicago Board Options Exchange.
o Clinton Group, which has $5.3 billion of assets under management in its hedge funds
and $4.1 billion in collateralized bond obligations, is the world's No. 14 hedge fund
group, according to rankings by Institutional Investor magazine.
o Coast Asset Management, one of the top hedge fund administrators in the US, uses
market-neutral investment strategies to try to make money for institutional clients and
wealthy individuals (and itself) in any economic climate.
o The company focuses on fixed-income investments, such as sovereign debt of G-7
nations and collateralized debt obligations, employing fixed-income arbitrage, multi-
manager portfolio management, and credit-spread strategies in administering its funds.
o Coast Asset Management has over $3.1 billion in assets under management
o Credit Suisse Asset Management (CSAM) is a leading global asset manager focusing on
institutional, mutual fund and private client investors, providing investment products
and portfolio advice in three regions (Americas, Asia Pacific and Europe) around the
world.
o Credit Suisse Asset Management has global assets under management of USD 341
billion and employs 1,885 people worldwide.
o Credit Suisse Asset Management is part of Credit Suisse First Boston (CSFB), a leading
global investment bank serving institutional, corporate, government and individual
clients.
o CSAM has investment capabilities in all major asset classes, including equities, fixed
income, balanced products and alternative investments.
o Henderson has been managing property assets for more than four decades and has
over £6.5 billion (€9.7 billion)* of property assets under management globally in the
form of segregated mandates, pooled funds, both balanced and sector specialist, for
direct property as well as property securities funds.
o J. Baer, with some $115 billion in assets under management, operates in many of the
world's financial centers.
o Man Group plc is a leading global provider of alternative investment products and
solutions as well as one of the world’s largest futures brokers
o Man Group has funds under management of $41 billion
o Mellon Financial Corporation (NYSE: MEL) has $500 billion in assets under management
o Mellon is one of the world's leading providers of asset management, trust, custody and
benefits consulting services
o Nuveen Investments has more than $109 billion in assets under management
o It has $3 billion in alternative investments
o RAB Capital plc has approximately $1,75 billion in assets under management
Schroders plc
31 Gresham Street
London EC2V 7QA
Tel: +44 (0) 207 658 6000
www.schroders.com
o Schroders is one of the world’s leading independent investment managers with assets
under management of approximately £100 billion including an active investment trust
business in the UK
o Soros Fund Management LLC has approximately $15 billion in assets under
management
o Tremont Capital Management, Inc. is one of the leading global alternative investment
management firms, whose business lines include research and investment
o American Express' mutual funds, hold nearly half of the $232 billon in assets under
management at the company
Citigroup Inc.
399 Park Ave.
New York, NY 10043
Tel: 212-559-1000
Fax 212-793-3946
Toll Free: 800-285-3000
www.citigroup.com
William Comfort, Citigroup Venture Capital
o Citigroup Inc has $7.9 trillion in assets under custody and trust.
o Citigroup’s new product line, Fund Services, was recognized as best in class for Mutual
Fund Administration and Hedge Fund Administration in Bermuda, one of the world’s key
hubs for offshore hedge funds.
o Countrywide Financial Corporation is a member of the S&P 500 and Fortune 500
o Countrywide Financial Group has $120.2 billion in assets under management and
serves some 13 million customers
o J.P. Morgan Chase (the #2 bank in the US) is one of the largest private banks in the
world, with more than $270 billion in client assets under management.
o J.P. Morgan Private Bank's offerings include asset management, lines of credit, private
equity investment, hedge funds, and custody and transaction services, as well as
advice on tax and estate planning and philanthropy.
o Merrill Lynch is one of the world’s leading financial management and advisory
companies, with offices in 36 countries and total client assets of approximately $1.6
trillion
MetLife, Inc.
200 Park Ave.
New York, NY 10166
Tel: 212-578-2211
Fax 212-578-3320
Toll Free: 800-638-5433
www.metlife.com
o Western & Southern Financial Group is a FORTUNE 500 company ranked eighth among
mutual life and health insurance companies in the country.
o It has in excess of $32 billion in assets owned and under management
AmSouth Bancorporation
PO Box 628327
Orlando, FL 32862-8327
1-800-581-7998
www.amsouthfunds.com
o Bank of America Capital Management, with more than $275 billion in assets under
management, provides individuals, small businesses and commercial, corporate and
institutional clients around the world new and better ways to manage their financial
lives.
o With more than $19 billion of private equity assets, $8.5 billion in fund of hedge funds,
and approximately $6 billion in leveraged investments and CDOs, as well as other
alternative investments, the Group manages over $34 billion in assets
o Deutsche Bank Alex. Brown is the U.S. Private Client Services division of Deutsche
Bank Securities Inc., the investment banking and securities arm of Deutsche Bank AG
in the United States.
o It has more than €849 billion in assets under management.
o Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed
income sales, trading and research, investment banking, private investment
management, asset management and private equity.
o It has more than $150 billion in assets under management
o The Nomura Group, one of the largest global investment banking and securities firms,
is represented in The Americas by Nomura Holding America Inc. (NHA),
o Nomura Securities International has more than $7.7 billion in assets under
management
o Société Générale is one of the largest financial services groups in the euro-zone
o It has more than $300 billion in assets under management
U.S. Bancorp
U.S. Bancorp Center,
800 Nicollet Mall
Minneapolis, MN 55402
Phone: 612-303-3381
Toll Free: 800-754-7221
am.usbancorp.com
o U.S. Bancorp, with assets under management of $195 billion, is the 6th largest
financial services holding company in the United States.
o CIBC World Markets is the wholesale banking arm of CIBC, providing a range of
integrated credit and capital markets products, investment banking, and merchant
banking to clients in key financial markets in North America and around the world.
o The firm has $63 billion in assets under management.
o Harris is an integrated financial service organization providing more than 1.5 million
personal, business, corporate and institutional clients with banking, lending, investing
and financial management solutions
o Harrisdirect provides direct investors with an award-winning trading platform, a broad
range of investment options, high-powered planning tools and access to eight leading
sources of research.
o The firm has $32 billion in assets under management
o Jefferies, a global investment bank and institutional securities firm, has served middle-
market and growth companies and their investors for over 40 years.
o The company has $3 billion in assets under management
Lazard LLC
121 Boulevard Haussmann
75382 Paris Cedex 08, France
Tel: +33-1-4413-01-11
Fax +33-1-4413-01-00
www.lazard.com
o Founded in 1962, Raymond James Financial, Inc. is now one of the largest financial
services firms in the United States, with 2,200 locations worldwide.
o The firm has $22 billion in assets under management
o RBC Dain Rauscher Inc., a wholly owned subsidiary of Royal Bank of Canada (RY: TSX,
NYSE), is one of Canada’s largest full-service securities firms
o It has $117 billion in assets under management
o UBS AG is a leading global financial services firm serving a diverse client base that
includes affluent individuals, corporations, institutions and governments.
o It has approximately $434 billion in assets under management worldwide
o Since 1987, Veronis Suhler Stevenson's private equity affiliate, VSS Fund Management
LLC, has managed four equity funds exclusively dedicated to investments in the media,
communications and information industries.
o It has more than $4 billion in assets under management
o Webster Financial Corporation is the holding company for Webster Bank and Webster
Insurance
o The firm has 12 billion in assets under management
Financial Services
1. Asset Management
2. Investment Banking
AmSouth Bancorporation
Banc of America Securities LLC
The Bear Stearns Companies Inc.
Citigroup Global Markets Europe Limited
Citigroup Global Markets Holdings Inc.
Citigroup Inc.
Credit Suisse First Boston LLC
Credit Suisse First Boston (USA), Inc.
Deutsche Bank Alex. Brown Incorporated
Deutsche Bank Securities Inc.
Goldman Sachs Group Holdings (U.K.)
The Goldman Sachs Group, Inc.
J.P. Morgan Chase & Co.
J.P. Morgan Securities Inc.
Lehman Brothers Holdings Inc.
Lehman Brothers Inc.
Lehman Brothers U.K. Holdings Ltd.
Merrill Lynch & Co., Inc.
Merrill Lynch Europe PLC
Morgan Stanley
Nomura Holdings, Inc.
Nomura International PLC
Société Générale
UBS Investment Bank
U.S. Bancorp
© 2005 Investment Analytics - Business Plan Appendix 6
b. Middle-Market Investment Banking
VO L AT I L I T Y
A R B I T R AG E P RO G R A M
F I N A N C I A L P RO J E C T I O N S
FEBRUARY 2005
CONTENTS
Management Summary.......................................3
Assumptions ........................................................4
Returns Processes ........................................................................... 4
Expenses....................................................................................... 5
Simulation Scenarios...........................................7
Results ...................................................................8
Conclusion............................................................8
Equity Investment Terms ..................................9
Results for Scenario 6 ...................................... 10
2
FINANCIAL PROJECTIONS
M A NA G E M E N T S U M M A RY
Investment Analytics is an investment research and consulting firm established by its Chief
Executive Jonathan Kinlay in 1998. Investment Analytics provides independent research focusing
on applications of sophisticated mathematical and financial modeling techniques to problems of
strategy development and repair, performance analysis and risk management for clients in the
investment management industry in Europe, North America and Asia. Full details about the firm, its
personnel and products and services is given on the web site:www.investment-analytics.com.
In 1999-2001 Investment Analytics developed a new framework for modeling and forecasting
asset volatility using advanced econometric models based on extensive theoretical and empirical
research. These models provided the basis for a volatility arbitrage program which was made
available under license to the hedge fund Caissa Capital in 2002. The arbitrage strategies proved
highly successful, producing double- and triple-digit uncorrelated alphas, and enabling the fund to
raise over $300M in assets from institutional investors in the US, Europe and Asia. Since expiration
of the Caissa license in 2004, Investment Analytics has issued a new license for use of its volatility
arbitrage program to the Proteom Fund, of which Mr. Kinlay is also a principal, in order to provide
the basis for a range of volatility arbitrage products. The Proteom Fund is expected to open in 2005
with Assets Under Management of $100M. Full details of the Fund including strategy presentations,
strategy analyses, performance statistics, due diligence information and offering documents, can be
found on the web site: www.proteomcapital.com
This document sets out financial projections for Investment Analytics, for the five years from
inception of the Proteom Fund. A variety of scenarios are considered in which different
combinations of products are launched in the first two years. The analysis suggests that the optimal
strategy would be to launch three already-developed products in year 1. Projections under this
scenario show Assets Under Management rising to over $1.7 Bn by year 5 and indicate a fair
valuation of Investment Analytics to be $61M.
Investment Analytics proposes to sell 49% of the equity for the sum of $58.6M.
3
ASSUMPTIONS
RETURNS PROCESSES
Financial projections are created using a Monte-Carlo simulation model in which strategy returns
follow random processes with expected average levels and standard deviations of return as set out in
the Table 1 below. The table also shows the management and performance fees for each strategy.
ASSET GROWTH
The growth in Assets Under Management (AUM) is computed from a baseline scenario as
shown in Table 2. The growth rate in any year is then adjusted for each strategy’s performance
during that year according to the formula:
rij
g ij = b j × i = 1K ,5; j = 1,K ,5
ei
Where
The baseline growth rate beyond year five is 4% per annum. Strategies such as the F500, F100
and G000, are likely to be close to capacity at this stage are assumed to grow at this rate. Other
strategies with greater capacity are assumed to have long term growth rates of 6% to 8%.
Asset Growth 2 3 4 5 5+
Baseline 150.00% 100.00% 75.00% 60.00% 4.00%
4
DISCOUNT RATES AND TERMINAL MULTIPLES
For strategies with established track records in prior funds we apply a discount rate to cash flows
of 50%. Strategies in this group are the F500, F1000 and G000 volatility strategy series. Cash flows
from the H500 strategy which is new, but based on a methodology similar to other existing strategies
with established track records, are discounted at 55%. A higher discount rate of 60% is used for the
E1000 strategy, which is entirely new. A weighted average discount rate (WADR) is computed from
individual strategy discount rates by weighting each rate by the proportion of total Assets Under
Management invested in each strategy. The WADR is used to compute a weighted average terminal
multiple (WATM), which is used to value cash flows beyond year 5.
M = 1 / (D – G)
STRATEGY RETURNS
These are assumed to follow a Normal distribution with means and standard deviations as shown
in Table 1. Strategy returns for each year are generated by sampling repeatedly (1,000 times) from
each of these distributions.
Fees are computed using the standard terms as set out in Table 1. License fees received by
Investment Analytics are computed at a standard rate of 50% of total management and performance
fees.
Although it is likely that discounts will be offered to large and early-stage investors, these are not
factored into the computations for fees. Instead a marketing allowance of 20% is made in the
expense calculations (see below).
EXPENSES
As previously mentioned, a marketing allocation of 20% of total fees (management fees and
performance allocation) is expensed against revenues.
Details of overhead computations are given in the workbook. The breakdown by expense
category for the first two years is summarized in Table 3. Beyond year 2, overhead is assumed to
grow at 50% of the rate of growth in assets. Under scenarios in which fewer than nine strategies are
launched, overhead is scaled down pro-rata by the number of strategies launched:
Ok = Om x Nk / 5
Where Om is the overhead applicable when all nine strategies are launched, and Nk is the number
of strategies launched in the current scenario k.
5
Overhead Expenses Year 1 Year 2
Hardware $365,499 $365,499
Software $446,000 $446,000
Data $302,500 $367,500
Staff $2,725,000 $4,200,000
Marketing $156,400 $270,000
Service Providers $484,000 $771,000
Operations $1,096,000 $2,124,400
$5,575,399 $8,544,399
Net cash flows in year i, CFi, are discounted using the weighted average discount rate using the
formula:
CFi
PVi =
(1 + WADR ) i
6
S I M U L A T I O N S C E NA R I O S
We consider a number of different launch scenarios for simulation purposes. In Scenarios 1 and
2 two products are launched in year 1 only. In Scenarios 3-5 we consider the launch of two strategies
in year 1, with a third strategy in year 2. In Scenarios 6-8 we assume that three products are launched
in year 1, and one new product in year 2. In the final scenario, we evaluate the outcome of launching
all five products (three in year 1 and two in year 2).
All scenarios consider a mix of medium and high performance strategies. The performance
characteristics of each product portfolio varies according to the simulated performance
characteristics of the products it includes. Product portfolios range in their performance
characteristics from “conservative” to “aggressive”. An example of the former is the portfolio in
Scenario 1, which include two strategies with existing track records of intermediate performance
(F500 and G000). An example of the latter is the portfolio in Scenario 8, which includes two high
risk/return volatility strategies. The range of scenarios considered is presented in Table 4.
7
R E S U LT S
Table 5 summarizes the simulation results for each of the scenarios. The results break down into
two groups, the first comprising Scenarios 1-4, the second comprising Scenarios 5-9.
In the first group we assume that at most two products are launched in year 1, with at most one
new product being introduced in year 2. Assets Under Management are expected to rise to around
$1.3Bn - $1.5Bn by year 5, and the cash flow NPV’s range from $30M to $40M.
The second group features scenarios in which three products are launched in year 1, with up to
two products introduced in year 2 (Scenario 5 is an exception, with only two product launches in year
1). For this group Assets Under Management are forecast to be considerably higher than for the
first group: in the range $1.7Bn to $2.3Bn. Cash flow NPV’s in this group range from $55M -
$61M.
One means of making a “like for like” comparison of the results for the different scenarios is to
consider the ratio of cash flow NPV to projected Assets Under Management. This ratio suggest that
the scenario with the best risk/reward characteristics is Scenario 6, in which the F500, F1000 and
G00 products are all launched in year 1.
CONCLUSION
Based on the financial projections in this analysis Investment Analytics should aim to license its
technology to facilitate the launch of three products during the first year of operations: the F500
Volatility Opportunity Fund (5x), the F1000 Volatility Opportunity Fund (10x) and the G000
Strategic Volatility Fund. This product portfolio should be capable of supporting Assets Under
8
Management of around $1.7Bn by year 5, generating licensing fees with an NPV estimated to be
$61M.
9
R E S U LT S F O R S C E NA R I O 6
Min
5,000 NPV of Cash Flows
Max
Mean
4,000 9.0%
($M)
3,000
8.0%
2,000
7.0%
1,000
6.0%
0
1 2 Year 3 4 5
5.0%
100 Min
3.0%
Max
80 Mean
2.0%
60
($M)
40
1.0%
20
0.0%
0
0
10
20
30
40
50
60
70
80
90
0
1 2 3 4 5 6
10
11
12
13
14
15
16
17
18
19
20
Year
-20
Total NPV ($M)
VO L AT I L I T Y
A R B I T R AG E P RO G R A M
DESCRIPTION OF MODELING SYSTEM AND
INVESTMENT PROGRAM
AND
Prepared for:
Copy #
NOTICE:
This document is intended only for the use of the individual or entity to which it is addressed,
and contains private and confidential information. If the reader of this document is not the
intended recipient you are hereby notified that any review, retransmission, dissemination,
distribution, copying or other use of this document is strictly prohibited. All material
contained herein is copyright © 2004 Investment Analytics (Bermuda) Ltd.
I N V E S T M E N T A N A L Y T I C S ( B E R M U DA ) LT D.
AUGUST 2004
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 2 -
Arbitrage Program
OV E RV I E W
The Investment Analytics proprietary arbitrage program comprises econometric models that produce
forecasts of future volatility of exceptional accuracy. One measure of the ability of the models,
direction prediction accuracy, shows that, on average, the models enable the correct timing of the
volatility market approximately 75% of the time. This extraordinary level of forecasting performance
accounts for the exceptional trading results achieved by the Caissa Capital Fund, which licensed the
investment program from Investment Analytics in 2002. The models are based on advanced
econometric research into the properties of asset volatility conducted by Mr Kinlay and other leading
academic researchers, dating from around 1996, most of which has yet to be released into the public
domain.
The system uses a variety of sophisticated analytical tools to identify option arbitrage opportunities
and construct long/short volatility portfolios that have the desired risk/return characteristics.
Specific trading recommendations are issued in the form of a daily trading sheet, which is emailed
automatically to traders and risk mangers before the start of the trading session. The system is run
concurrently on two independent servers, one based in New York, the other In the UK, to ensure
failsafe delivery and backup.
Hedge fund arbitrage strategies using the Investment Analytics program produced returns of
between 15% and 1600% in 2003 and have remained very profitable during 2004.
DA TA M A NA G E M E N T S Y S T E M
The data management system is an automated system that handles the process of downloading and
validating stock and option data for the stocks in the investment universe. Currently around 100,000
data items for an investment universe comprising 150 stocks in the S&P500 are downloaded at the
end of each trading day, including market closing prices for each stock and options with varying
strikes and maturities. The data are subjected to a number of integrity checks prior to being added to
the databases. These are then manipulated by the Model Management System to update the
individual forecasting models.
The data management system is highly robust and operates on two independent servers to ensure
redundancy.
The Investment Analytics proprietary arbitrage program comprises econometric models that produce
forecasts of future volatility of exceptional accuracy. One measure of the ability of the models,
direction prediction accuracy, shows that, on average, the models enable the correct timing of the
volatility market approximately 75% of the time. This extraordinary level of forecasting performance
accounts for the exceptional trading results achieved by the Caissa Capital Fund, which licensed the
investment program from Investment Analytics in 2002.
The modelling system analyses stock and option data at the end of each trading day, updates volatility
forecasts, and identifies new arbitrage opportunities. Using complex portfolio construction
algorithms, the system produces a trading sheet which contains specific recommendations specifying
the quantities of each option be bought or sold, the theoretical edge of the trade and the hedging
requirement. The trading sheet is emailed automatically to traders and risk managers before the start
of each trading session.
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 3 -
FORECASTING MODELS
The system operates on a ground-up approach with several different individual models for every
asset in the investment universe. Each model emphasises different aspects of volatility behavior and
will perform best under different market conditions. The types of model include:
i. Long memory models that model the important long term serial autocorrelation effects
which are pervasive in asset volatility processes. These models perform best when the
behaviour of the process is dominated by reinforcing trends, such as applied in the
period from 1995–1999 and from 2003–mid 2004 in US equity volatility markets.
ii. Short term models that capture transient mean-reverting behaviour, another important
characteristic of volatility. These models typically give rise to contrarian trading
recommendations.
iii. Models that follow the interaction and feedback between the asset returns and volatility
processes, which give rise to skewness and kurtosis in the returns process.
iv. Asymmetry models that take account of the tendency of volatility to spike more during
market sell-off than during periods when the market is strong.
v. Multifactor models that model the interaction of long memory and transient volatility
processes.
vi. Markov models that identify different volatility regimes and associated state transition
probabilities.
M O D E L M A NA G E M E N T S Y S T E M
The models are maintained by a Model Management System (“MMS”) that analyses the data
processed by the data management system, updates each of the models, produces current forecasts
and evaluates the performance of each of the models. The MMS rates each model on approximately
30 different criteria and compares the current performance of each model with its historical
performance, with the performance of other models of the same process and with the performance
of models for other asset processes. The MMS then selects the best models whose aggregate results
lie in the upper quartile of performance. In this way the system automatically biases volatility
forecasts to favour models best suited to current market conditions, while filtering out models which
are currently performing with lower levels of accuracy.
O P T I O N A NA LY S I S
The next stage of the process is for the system to identify risk arbitrage opportunities amongst the
universe of equity options under consideration. The system selects the stocks for which the
forecasting models are performing at the highest levels and evaluates the options using the volatility
forecasts and proprietary option pricing models. The system then “cherry picks” the best
opportunities where the differential between market and theoretical value exceeds a minimum
threshold level., which can be set by the model user.
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 4 -
C O I N T E G R A T I O N A NA LY S I S A N D P O RT F O L I O C O N S T RU C T I O N
During the portfolio construction stage the modelling system decides the amounts of capital to
allocate to the available arbitrage opportunities. The system examines the multivariate behaviour of
the volatility processes and identifies cointegrated baskets, comprising long and short volatility
positions that typically have more stable risk-returns characteristics than the individual underlying
processes. The procedure is comparable to the mean-variance optimization procedure due to
Markovitz, but is significantly more sophisticated. The resulting baskets, or portfolios, tend to have
more stable and robust performance characteristics than portfolios constructed in the traditional way
using correlations, as the latter are notoriously unreliable, especially during market crashes.
The cointegrated baskets identified by the system are tested by a simulation processes to ensure that
their performance characteristics meet the minimum criteria and behave robustly under varying
market conditions. A genetic algorithm is employed to select the most appropriate baskets for
trading.
MODEL OUTPUT
The final stage of the process entails the creation and distribution a trading sheet containing the
detailed trading recommendations. The sheet gives the current volatility forecast for every stock in
the investment universe, but highlights only those option trades which meet the pricing differential
criterion. Options that have been selected for purchase (sale) are highlighted in blue (red), and the
sheet gives the market bid and offer prices and the theoretical price based on the latest volatility
forecasts. In addition, the output shows the quantity of options to be bought or sold, the % price
differential and the option delta, so that trades can readily be executed on a market-neutral basis.
Trading sheets are contained in an Excel workbook, which is emailed by an automated email server
to a specified list of email recipients, usually members of the trading and risk management teams.
Option Values 03-Dec-03 Expiry: 16-Jan % Cutoff 30% $ Cutoff 0.1
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
FCST Spreads Code Jan-04 OTM PUT Code Jan-04 ATM PUT Code Jan-04 ATM CALL Code Jan-04 OTM CALL
Stock Price Vol Model Total B/S Strike Bid Ask Theory B/S Strike Bid Ask Theory B/S Strike Bid Ask Theory B/S Strike Bid Ask Theory
HDI 46.50 19% ** HDIMV 42.5 0.40 0.50 0.12 HDIMW 47.5 2.05 2.20 1.77 HDIAW 47.5 1.10 1.20 0.89 HDIAK 55 0.10 0.01
1.65 S 30% 222% -0.08 -906 27% 16% -0.60 -896 23% 24% 0.40 -1,179 25% -100% 0.01 27,986
HON 29.64 23% ** HONMY 27.5 0.20 0.35 0.21 HONMF 30 1.10 1.20 1.11 HONAF 30 0.70 0.80 0.82 HONAZ 32.5 0.10 0.20 0.17
1.7 27% -03% -0.16 39,080 26% -0.53 20% -03% 0.47 11,718 22% 20% 0.14 -7,656
HPQ 22.41 32% *** HHYMD 20 0.15 0.20 0.18 HHYMX 22.5 0.85 0.90 1.01 HHYAX 22.5 0.75 0.80 0.98 HPQAE 25 0.10 0.15 0.23
1.81 33% -16% -0.14 9,387 29% -11% -0.48 2,416 24% -18% 0.52 1,513 25% -36% 0.18 3,155
IACI 30.96 37% ** QTHMY 27.5 0.45 0.55 0.36 QTHMF 30 1.15 1.25 1.11 QTHAF 30 2.30 2.40 2.14 QTHAZ 32.5 1.00 1.20 1.01
1.74 43% 27% -0.16 -2,650 41% 04% -0.37 -6,069 41% 07% 0.63 -1,589 38% 19% 0.39 -1,308
IBM 90.30 15% *** IBMMO 75 0.05 0.10 0.00 IBMMR 90 2.15 2.20 1.60 IBMAR 90 2.70 2.70 2.13 IBMAA 105 0.05 0.10 0.00
1.91 28% 36167% 0.00 -5,816 S 21% 34% -0.45 -532 18% 27% 0.55 -505 22% 1586% 0.00 -6,166
ICOS 44.80 50% * IIQMG 35 0.30 0.40 0.24 IIQMI 45.00 2.75 2.95 3.16 IIQAI 45.00 2.50 2.70 3.07 IIQAK 55.00 0.20 0.35 0.52
1.3 56% 27% -0.06 -3,960 47% -07% -0.47 1,174 41% -12% 0.53 669 B 42% -33% 0.14 1,438
IMCL 41.49 52% *** QCIMF 30 0.35 0.50 0.09 QCIMH 40 2.90 3.20 2.24 QCIAH 40 4.40 4.70 3.83 QCIAJ 50 1.25 1.30 0.68
1.96 S 74% 269% -0.03 -1,186 69% 30% -0.38 -457 64% 15% 0.62 -527 S 66% 83% 0.18 -533
Beginning in 1998 Mr Kinlay researched and developed a number of sophisticated econometric models used for measuring
and forecasting the volatility of financial processes such as asset returns. In 2002 Mr Kinlay formed a hedge fund, Caissa
Capital LP, and invited two associates to join him in that venture as partners. The models were licensed to Caissa Capital to
provide the basis for the firm’s volatility arbitrage strategies. The strategies proved very profitable and assets under
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 6 -
management quickly grew to over $160M. Having established the underlying concept within Caissa Capital, Mr Kinlay has
decided to focus on his work in Investment Analytics and to start a new hedge fund, the Proteom Fund.
Are there any new principals or owners since founding? If Yes, who? No.
Who owns the firm? Are any owners not active in the firm’s management?
Mr. Jonathan Kinlay is the owner of the firm and he is active in the firm’s management.
Does the Firm have any branch offices/locations/operations? What activities are conducted at them? The firm is located in
Bermuda. It conducts research activities there and in other locations in the USA and Europe.
Do the principals engage in any business activities outside of the firm?
Jonathan Kinlay is the General Partner of the Proteom Fund, a quantitative equity hedge fund. based in New York and Bermuda.
Who is primarily responsible for managing research analysts? How many analysts are there?
At present, Mr. Jonathan Kinlay is responsible for the ongoing research effort.. Consultants are employed to assist in the development of
new technologies.
Who is primarily responsible for managing operations? How many operations people are there? Mr. Kinlay is responsible
for operations. Dr Christopher Rosevear is also employed in operations.
What is the total number of firm employees? How many are dedicated full time to the Strategy?
At present Mr. Jonathan Kinlay is the only employees. All bookkeeping, accounting and administrative work has been outsourced.
How are employees and principals compensated? What percentage of principals’ compensation is salary vs. bonus?
Investment Analytics earns consulting and licensing fees. There is a direct correlation between compensation and authority.
Are any legal or disciplinary actions being taken against the Firm, its affiliates, or its principals? Have any been taken? What
were the outcomes?
There are no pending legal or disciplinary actions being taken against the firm or any of its affiliates or principals. There have been no legal
or disciplinary actions taken against the firm in the past.
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 7 -
MODELING SYSTEM
In addition, the system applies a wide variety of known econometric theory, some of which is described in the paper “Long
Memory and Regime Shifts in Asset Volatility”, published in Wilmott magazine in 2003.
What data does the system use? Does the system use fundamental data?
Fundamental data is used only to help in defining and selecting the investment universe. The models themselves use
historical prices to construct asset returns, volatility and correlation series.
The models have been tested on US and European equities, Pacific Rim equity markets, and approximately eleven emerging
markets. Limited tests have been performed in currency and commodities markets. The models performed well in all tests.
What is cointegration?
The concept of cointegration was due to Nobel prize winning economist Clive Granger in the 1990’s. It is best illustrated
by means of an example. Consider the prices series of a spot and futures contract on a commodity such as gold. Both
series are non-stationary – the prices of gold can vary anywhere between $200 and $800 an ounce (or higher). If fact the
series are integrated order 1, meaning that the first difference of each series (i.e. the returns process) is a stationary white
noise process. Non-stationery series are, understandably, very difficult to trade profitably.
Now consider a series consisting of the differential between the spot and futures prices, i.e. the Basis. This too is a
stochastic process, but unlike the price series it is stationary – it fluctuates inside a range. The reason for this behavior is of
course that cash and carry arbitrage obliges the basis to remain within bounds. In this example, we would say that the spot
and future price series are cointegrated order 1. There are two important points to note. The first is that cointegrated
“baskets” such as the Basis in the above example, are inherently more stable, and hence easier to trade, than the underlying
non-stationery price processes. The second point is that cointegration relationships tend to be more reliable than
correlation relationships because they relate to some underlying economic factor (cash and carry arbitrage, in the example).
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 9 -
Hence portfolios constructed using the principles of cointegration will tend to have more reliable risk/return characteristics
than portfolios constructed using classical portfolio theory, which is based on (unstable) correlations.
Describe the option pricing models are used to evaluate arbitrage opportunities.
The modelling system uses proprietary Monte-Carlo option pricing models which price options based on the forecast asset
volatility over the life of the option. The option models are two factor models (one factor for the returns process, the
second for the volatility process) that take account of volatility skews, kurtosis in the underlying returns distributions as well
as important asymmetry effects in the volatility process itself.
FCST Spreads Code Jan-04 OTM PUT Code Jan-04 ATM PUT Code Jan-04 ATM CALL Code Jan-04 OTM CALL
Stock Price Vol Model Total B/S Strike Bid Ask Theory B/S Strike Bid Ask Theory B/S Strike Bid Ask Theory B/S Strike Bid Ask Theory
HDI 46.50 19% ** HDIMV 42.5 0.40 0.50 0.12 HDIMW 47.5 2.05 2.20 1.77 HDIAW 47.5 1.10 1.20 0.89 HDIAK 55 0.10 0.01
1.65 S 30% 222% -0.08 -906 27% 16% -0.60 -896 23% 24% 0.40 -1,179 25% -100% 0.01 27,986
HON 29.64 23% ** HONMY 27.5 0.20 0.35 0.21 HONMF 30 1.10 1.20 1.11 HONAF 30 0.70 0.80 0.82 HONAZ 32.5 0.10 0.20 0.17
1.7 27% -03% -0.16 39,080 26% -0.53 20% -03% 0.47 11,718 22% 20% 0.14 -7,656
HPQ 22.41 32% *** HHYMD 20 0.15 0.20 0.18 HHYMX 22.5 0.85 0.90 1.01 HHYAX 22.5 0.75 0.80 0.98 HPQAE 25 0.10 0.15 0.23
1.81 33% -16% -0.14 9,387 29% -11% -0.48 2,416 24% -18% 0.52 1,513 25% -36% 0.18 3,155
IACI 30.96 37% ** QTHMY 27.5 0.45 0.55 0.36 QTHMF 30 1.15 1.25 1.11 QTHAF 30 2.30 2.40 2.14 QTHAZ 32.5 1.00 1.20 1.01
1.74 43% 27% -0.16 -2,650 41% 04% -0.37 -6,069 41% 07% 0.63 -1,589 38% 19% 0.39 -1,308
IBM 90.30 15% *** IBMMO 75 0.05 0.10 0.00 IBMMR 90 2.15 2.20 1.60 IBMAR 90 2.70 2.70 2.13 IBMAA 105 0.05 0.10 0.00
1.91 28% 36167% 0.00 -5,816 S 21% 34% -0.45 -532 18% 27% 0.55 -505 22% 1586% 0.00 -6,166
ICOS 44.80 50% * IIQMG 35 0.30 0.40 0.24 IIQMI 45.00 2.75 2.95 3.16 IIQAI 45.00 2.50 2.70 3.07 IIQAK 55.00 0.20 0.35 0.52
1.3 56% 27% -0.06 -3,960 47% -07% -0.47 1,174 41% -12% 0.53 669 B 42% -33% 0.14 1,438
IMCL 41.49 52% *** QCIMF 30 0.35 0.50 0.09 QCIMH 40 2.90 3.20 2.24 QCIAH 40 4.40 4.70 3.83 QCIAJ 50 1.25 1.30 0.68
1.96 S 74% 269% -0.03 -1,186 69% 30% -0.38 -457 64% 15% 0.62 -527 S 66% 83% 0.18 -533
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 10 -
INVESTMENT STRATEGY
The strategy also employs sophisticated risk controls to ensure that at all times the account is operating within acceptable Value-at-Risk
limits and that its exposure to extreme market or volatility moves is managed within pre -defined limits.
The pricing of most exchange-traded options is based on variants of the vanilla Black-Scholes model and its extensions. Among the
model’s main shortcomings are the assumptions of Gaussian distributed returns and constant volatility in the underlying. Empirical
studies have demonstrated consistently that returns follow a distribution that is skewed and leptokurtic: markets are more likely to remain
where they are or make a large move than a Normal distribution would suggest. It is evident, too, that volatility is not constant, but
stochastic, and may fluctuate in a wide range depending on general market conditions and firm-specific events. There are several
extensions to Black -Scholes which enable non-Normal returns, stochastic volatility and long memory effects to be incorporated into the
model. Although option prices are typically adjusted to account for the effects of stochastic volatility and non-Gaussian returns, this is
not always the case. According to our analysis, at certain times both put and call options are under- or over-priced by as much as 30%.
Part of what we are seeking to do in our investment strategies is to capture these mis -pricing opportunities.
An important element in the investment strategy is the prediction of future volatility. We know from empirical research that, in addition to
being stochastic, volatility is typically both very volatile and highly persistent. We use these additional characteristics of volatility to improve
investment performance and enhance the risk-reward profile of the basic strategy.
Investment Analytics has developed a proprietary volatility index that measures underlying volatility more accurately and efficiently than
traditional methods. Using proprietary econometric models we are able to correctly anticipate the future direction of volatility an
average of 72%-75% of the time in the universe of stocks and equity indices we analyze, and identify regimes of unsustainably high or low
levels of volatility with a high degree of accuracy. These additional techniques enable us to select investment opportunities that offer the
greatest risk-reward trade-off.
The Strategy seeks to achieve its target returns by trading volatility portfolios comprising long and short positions in options on major
listed equities and indices, primarily the DOW 30 and the 150 largest cap SP500 index stocks. The strategy resembles a traditional
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 11 -
long/short equity hedge fund strategy, with the attendant benefits of risk reduction through diversification. We supplement this with
hedging mechanisms that are specifically designed to protect the portfolio in the event of a market crash. The result is a portfolio
producing high risk-adjusted rate of return with very stable performance characteristics.
The Strategic Volatility Strategy is based on certain statistical properties of volatility processes that render them more amenable to econometric
modeling than asset returns processes. Specifically, volatility processes exhibit 'long memory' behavior in which events affecting the series
today continue to affect it for many months into the future. In principle, this makes volatility more easily forecastable. Our quantitative
methodology identifies volatility processes that are co -integrated (i.e. that tend to vary together in a stable pattern) and applies sophisticated
econometric models to produce volatility forecasts that are then fed into our option pricing models. Sophisticated genetic algorithms are
then used to construct volatility portfolios that have appropriate risk-return characteristics. The final step in portfolio construction is to
overlay an optimal hedge that protects the portfolio against extreme market moves. The hedge is constructed using CrashMetrics®, a
proprietary risk management technology.
The investment universe comprises options on around 150 leading equities that are members of the S&P 500 Index. These include many
household names such as BAC, BMY, C, DOW, GE, GM, IBM, JNJ, MMM, MRK, PG and WMT. Investment Analytics has
constructed sophisticated, proprietary volatility models for each of these stocks that enable us to identify short-term opportunities to
buy or sell options that are trading at uneconomic prices. A trade may be executed using any one of a number of possible option
combinations, including verticals, calendars or butterflies, and typically will be initiated with 5 – 50 days to expiration. Some of these trades
are designed to exploit a mismatch between the forecast level of volatility and that priced into the options (the implied volatility). In other
cases the chief intention is to trade the volatility skew. In the majority of cases the trades will be initiated close to delta -neutral and the
strategy seeks to maintain a non-directional, delta-neutral position by selling or buying SPYDRs at the close of each trading day.
The strategy also employs sophisticated risk controls to ensure that at all times the account is operating within acceptable Value-at-Risk
limits and that its exposure to extreme market or volatility moves is managed within pre -defined limits.
Using these volatility forecasts, the modeling systems then seek to identify risk arbitrage opportunities comprising options which are
substantially under-priced or over-priced, on the basis of proprietary option pricing models. These arbitrage opportunities are
identified in an electronic trading sheet which is routed to the trading system for review by the trading team prior to execution.
Typically 50-60 arbitrage opportunities are identified in each daily trading sheet. These arbitrage opportunities are used to construct the
volatility portfolios incrementally each day. Volatility portfolios are consequently widely diversified, not only with regard to the number
of stock in which positions are held, but also with regard to option expiration, strike and entry point. This serves to mitigate the stock-
specific volatility risk in the portfolio of each of the Funds. As a consequence, the number of positions in a given portfolio, as well as
its average tenor, will vary over the course of time as existing positions expire and new positions are added.
Since the profitability of the strategies is dependent upon the differential between the strategies’ view of volatility and that held by the
market (as expressed by option implied volatility), it is important that the majority of the positions in the portfolio are held until option
expiration. Consequently, we are attentive to the issue of hedging the portfolio risk over the expiration cycle, and in particular to
maintaining market neutrality. At the end of each day, the inventory of current positions is loaded automatically into the risk
management system for analysis. A daily risk analysis is produced several hours before the start of each trading day which seeks to
identify the Value-at-Risk (VaR) in the existing volatility portfolio of each Series Fund and each of its constituent elements. Positions
which may be contributing significantly to the total VaR, or which have low or negative expected return, are marked for individual
hedging using underlying stocks, or may be liquidated prior to expiration. The risk management system also seeks to identify an excess
or deficit in the overall portfolio deltas, which are then hedged at the start of the trading session using a combination of underlying
stocks and SPYDRS (as a market proxy). The risk system also evaluates the Gamma, Theta and Vega risk of the portfolio, and
performs stress tests to assess the exposure to crashes either in the overall market or in market volatility, or both.
What opportunities are being exploited? The Strategy takes arbitrage positions in options on our universes of 150 SP500 stocks
which, based on our valuation models, are mis-priced by minimum of 30% (average 55%). These opportunities typically arise from
the hedging and speculation activities of market participants for whom derivatives are of secondary concern, including equity portfolio
managers, market timing strategists, and those pursuing yield enhancement strategies such as covered call writing.
Which market environment does this strategy perform well/poorly? For the Strategy to perform it we requires either (a) a wide
divergence of views as to the level of future volatility in universe of stocks we trade or (b) a consistent, but incorrect, view of future
volatility. The first of these situations is the normal state of volatility markets. The second arises from time to time and can be highly
profitable for our strategy (for example in Feb 02).
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 12 -
The strategy would perform poorly in a situation where the market held a consistent, correct view about future volatility in a large
proportion of stocks in our investment universe. Such a situation has arisen in the past in currency markets during Euro convergence,
but is highly unlikely to arise in equity markets.
Describe the idea generation process: The process of identifying arbitrage opportunities is entirely automated and model-driven. The models
identify 50-60 potential investment opportunities each day in options which are under- or over-priced by 30% or more. Co-integration analysis is
used to identify how these potential trades should be combined to create volatility baskets with stable risk-return characteristics which meet our
investment objectives. Our overall portfolio is constructed using these volatility baskets.
Describe why the strategy should be expected to generate excess returns over time:
In recent years many important discoveries have been made in the study of volatility. Only in the past year has “Volatility” become a
media buzzword. As a niche area of the marketplace, it has been slow to attract the attention and resources of the powerhouse firms on
Wall Street. This represents both uncharted territory and opportunity for those with the tools to exploit them.
The research team at Investment Analytics believes this creates the opportunity for generating alpha for a number of years to come.
However, it will be important to keep a vigilant eye on theoretical discoveries in the area of volatility. In order to maintain the Investment
Analytics advantage, it will be incumbent upon the research team to incorporate worthwhile discoveries into existing models and
strategies. Practical considerations are keeping pace with constantly improving execution platforms and technologies as well as the
structural changes in the US options markets. As with any financial strategy, success will encourage others to devote talent and resources.
Over time, the existing marketplace will either:
a. have to expand to accommodate the new entrants
b. have narrowing spreads (edge)
c. squeeze out less talented entrants
Investment Analytics management foresees this process as taking a minimum of three to five years. The most likely scenario by that
time is a recovering stock market, leading to expanding marketplace [there are already signs of increased public participation (retail)
returning to the options market. In addition, a rising market tends to lead people away from statistical based strategies and back to the realm
of directional and momentum strategies. Therefore it is quite possible the Investment Analytics volatility arbitrage program will be very
viable over the medium to long term.
Describe the investment objectives of the strategy (return, risk, correlation, other):
The Strategic Volatility Strategy is a volatility statistical arbitrage strategy designed to produce annual returns of 15% - 20%% with a
volatility of 6%-9%%. The strategy seeks to achieve its target returns by trading volatility portfolios comprising long and short positions
in options on major listed equities and indices, primarily the DOW 30 and the 150 largest cap SP500 index stocks. The strategy resembles a
traditional long/short equity hedge fund strategy, with the attendant benefits of risk reduction through diversification. We supplement
this with hedging mechanisms that are specifically designed to protect the portfolio in the event of a market crash. The result is a
portfolio producing high risk-adjusted rate of return with very stable performance characteristics.
The Strategic Volatility Strategy is based on certain statistical properties of volatility processes that render them more amenable to
econometric modeling than asset returns processes. Specifically, volatility processes exhibit 'long memory' behavior in which events
affecting the series today continue to affect it for many months into the future. In principle, this makes volatility more easily forecastable.
Our quantitative methodology identifies volatility processes that are co -integrated (i.e. that tend to vary together in a stable pattern) and
applies sophisticated econometric models to produce volatility forecasts that are then fed into our option pricing models. Sophisticated
genetic algorithms are then used to construct volatility portfolios that have appropriate risk-return characteristics.
Investment Analytics also enjoys the advantage of being able to correctly predict the direction of volatility in the underlying assets, 72%-
75% of the time. This is combined with portfolio optimization, stringent risk management and low cost execution.
S&P500 index constituents. Our investment universe includes the leading companies from virtually every industrial sector, from capital
goods to pharmaceuticals. Some assets we trade only from the short or long side, but the majority we take either long or short positions
depending on market conditions and our model projections, which may vary from month to month. In general the fund will have short
positions in around 400-600 stock or index options and an equal number of longs. All investments are executed as long or short
positions in at-the- money straddles or butterflies, typically with 30 – 60 days to expiration.
How many investments are used on the portfolio’s long side and short side?
A typical portfolio at present contains 400-600 positions. The Strategy does not have a long volatility or short volatility mandate. In any
given period of time, the portfolio can lean as high as 70% to 30% in either direction. Historically the portfolio has shown an
approximate 60% short volatility bias.
What is the range of market capitalization of positions and the liquidity of investment positions?
The underlying equities are household names (i.e. IBM,GE,GM, MRK etc) that are either in the S&P top 200, or are number 1, 2 , or 3
in their industry sector. The universe of securities that is traded is very liquid.
What is the maximum allowed single position size by percent of NAV? Typically no
more than 4% of available capital is allocated to a single entity.
STRATEGY PERFORMANCE
Total Months Since Inception: 21 ITD Annualized Daily Std Deviation: 6.98%
Total Months Since Inception: 21 ITD Annualized Daily Std Deviation: 70.94%
Do you expect the strategy’s performance going forward to differ from prior performance? Why? “
In recent years many important discoveries have been made in the study of volatility. Only in the past year has “Volatility” become a media
buzzword. As a niche area of the marketplace, it has been slow to attract the attention and resources of the powerhouse firms on Wall
Street. This represents both uncharted territory and opportunity for those with the tools to exploit them. The management team at
Investment Analytics believes this creates the opportunity for generating alpha for a number of years to come. However, it will be
important to keep a vigilant eye on theoretical discoveries in the area of volatility. In order to maintain the Investment Analytics advantage,
it will be incumbent upon the management team to incorporate worthwhile discoveries into existing models and strategies. Practical
considerations are keeping pace with constantly improving execution platforms and technologies as well as the structural changes in the US
options markets. As with any financial strategy, success will encourage others to devote talent and resources. Over time, the existing
marketplace will either a) have to expand to accommodate the new entrants, b) Spreads (edge) in the marketplace will narrow, or c) The less
talented entrants will be squeezed out and move on to other areas. Investment Analytics management foresees this process as taking a
minimum of three to five years. The most likely scenario by that time is a recovering stock market, leading to expanding marketplace [there
are already signs of increased public participation (retail) returning to the options market]. In addition, a rising market tends to lead people
away from statistical based strategies and back to the realm of directional and momentum strategies. Therefore it is quite possible the
Investment Analytics volatility arbitrage strategy will be quite viable for the foreseeable future.
What is the correlation of your strategy with managers implementing a similar strategy? We believe this to be a
unique strategy.
How many days per month on average do you generate a positive return? On average the
portfolio generates positive return about 65% of the month.
What is the highest number of days in a month you would expect to show negative returns? We expect the highest
number of negative return days in a month to be 6 out of 20.
How long did it take you to recover from the largest peaks to valley drawdowns?
Draw down ______ Start ___________ Bottom _________ Full Recovery______________ Reason
INVESTMENT ANALYTICS VOLATILITY ARBITRAGE PROGRAM PAGE - 15 -
Provide monthly returns for the strategies which use the Investment Analytics Investment Program.
Strategies undertaken by the fund are not intended to track any index. The fund may employ leverage. Past
performance is not necessarily an indicator of future results. Nothing here should be construed as a solicitation of
clients, or as an offer to sell or a solicitation of an offer to invest in the fund. Such activities may be made only
pursuant to a private placement memorandum. As a matter of practice, Investment Analytics (Bermuda) Ltd does
not solicit investments on behalf of any fund. NO REPRESENTATION IS MADE THAT ANY INVESTOR IN
THE PARTNERSHIP WILL OR IS LIKELY TO ACHIEVE RESULTS COMPRABLE TO THOSE SHOWN
OR WILL MAKE ANY PROFIT AT ALL OR WILL BE ABLE TO AVOID INCURING SUBSTANTIAL
LOSSES. While every effort has been made to provide data from sources considered to be reliable, no guarantee
of accuracy is given.