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BULL

MARKET IN FEAR

G R A N T S F A L L C O N F E R E N C E / N E W Y O R K C I T Y - O C T O B E R 2 3 , 2 0 1 2
For Investment Professional Use. Not for DistribuLon

Christopher Cole, CFA

Artemis Capital Management LLC


Artemis Vega Fund LP

520 Broadway, Suite 350
Santa Monica, CA 90401
(310) 496-4526 phone
(310) 496-4527 fax
info@artemiscm.com

You cannot stop the waves, but you can learn to surf
Jon Kabat-Zinn
DeniLon of fear from Merriam-Webster

BULL MARKET IN FEAR

We live in uncertain Zmes a bull market in fear


VolaZlity is the market price of uncertainty

VolaZlity at Worlds End DeaZon


Imagine the world economy as an armada of ships passing through a narrow and
dangerous strait between the waterfall of dea;on and hellre of ina;on
Our resolu;on to avoid one fate may damn us to the other

IllustraLon by Brendan Wui based on concept by Christopher Cole

BULL MARKET IN FEAR

What is VolaZlity?

VolaZlity shocks are righhully associated with deaZonary crashes


120

Volatility at World's End Deflation


Dow Jones Industrial Index (RHS) vs. 1-month Realized Volatility of DJIA (LHS)
50,000

100

Realized Volatility (%)

DJIA (logarithmic scale)

80

BULL MARKET IN FEAR

VolaZlity in Worlds End DeaZon

5,000

60

40

500

20

50

2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
1946
1944
1942
1940
1938
1936
1934
1932
1930
1928

Extreme volaZlity can also occur in hyperinaZon

80

Performance in paper marks (mil)

100

Adj. according to USD exchange rate

60

Adj. according to wholesale index numbers


In paper marks, Weimar

40
20

Aug-23

Nov-23

Aug-23

Nov-23

May-23

Feb-23

Nov-22

Aug-22

May-22

Feb-22

Nov-21

Aug-21

May-21

Feb-21

Nov-20

Aug-20

May-20

Feb-20

Aug-19

May-19

Feb-19

Nov-18

Aug-18

May-18

Feb-18

2,000

Weimar VIX?(1)
Realized Volatility of German Stock Market during Weimar Republic Hyperinflation
(monthly volatility data annualized)

1,500

Volatility (%)

100,000,000
10,000,000
1,000,000
100,000
10,000
1,000
100
10
1
0
0
0
0
0
0

Performance of German Stock Market


during Weimar Republic Hyperinflaton

Nov-19

Performance adj. for fixed exchange

120

BULL MARKET IN FEAR

VolaZlity in Hellre of InaZon

1,000
500

Source: Economics of InaLon; A Study of Currency DepreciaLon in Post-War Germany" by ConstanLno Bresciani-Turroni Out of Print / 1968
(1) Based upon monthly realized variance from available stock price data.

May-23

Feb-23

Nov-22

Aug-22

May-22

Feb-22

Nov-21

Aug-21

May-21

Feb-21

Nov-20

Aug-20

May-20

Feb-20

Nov-19

Aug-19

May-19

Feb-19

Nov-18

Aug-18

May-18

Feb-18

There are known knowns; there are things we know that we know. There are known unknowns;
that is to say there are things that, we now know we don't know. But there are also unknown
unknowns there are things we do not know, we don't know.
Donald Rumsfeld, United States Secretary of
Defense

Known Unknowns
US Fiscal Cli
China hard landing
War with Iran

Risks that you


know and can
quan7ty

European Crisis
Global Recession
Fiscal Austerity

Vola;lity
Vanilla Op7ons
VIX Index

Unknown Unknowns

Realized Vola7lity
Variance Swap

Risks that you


know but cant
quan7fy

BULL MARKET IN FEAR

Everything you need to know about trading volaZlity

Vola;lity of Vola;lity
Forward Vola7lity Tail Risk Hedging
Convexity
Vol Curve Trades

Risks that you


dont know but
could quan7fy

Risks that you


dont know and
cant quan7fy
5

Two very dierent styles of crash depending

Known Unknowns

Unknown Unknowns

Debt-Cycle Crash

Existen;al Flash Crash

(2008 Crash, Great Depression)

(Black Monday 1987, 2010 Crash)

Crash occurs over 7me (months)


Slow recovery
Natural end of leveraging cycle
High vola7lity for long period
Elevated vola7lity-of-vola7lity
Start of a recession or depression

Predictable
(in retrospect)

BULL MARKET IN FEAR

Everything you need to know about trading volaZlity

Hyper-speed crash (days, seconds)


Fast recovery
Market fragmenta7on
Extreme vola7lity for shorter period
Extreme vola7lity-of-vola7lity
Omen of future recession (olen)

Unpredictable
(even In retrospect)

What is the Bull Market in Fear?

New paradigm for pricing risk that emerged a^er the 2008 nancial crisis as
related to our collec;ve fear of the next dea;onary crash

Bull Market in Fear is Dened by



1. Abnormally Steep VolaZlity Term-Structure

BULL MARKET IN FEAR

Bull Market in Fear

2. DistorZons in VolaZlity from Monetary Policy


3. Expensive Porholio Insurance
4. Violent VolaZlity Spikes and Hyper-CorrelaZon

Structural imbalances in supply-demand dynamics of volaZlity markets


I. EmoZonal

Post-traumaZc DeaZon Disorder


Desire for safety and security at any cost

II. Monetary

Forced parZcipaZon in risk assets drives desire for hedging


Unspoken feeling that gains in nancial assets are arZcial

Greater
Demand for
VolaZlity

BULL MARKET IN FEAR

Bull Market in Fear

III. Macro-Risks

Debtor-developed economies face structural headwinds


Unrest in Middle East

IV. Regulatory
Government regulaZon (Dodd-Frank, Volcker rule) has
constrained risk appeZte for banks to supply volaZlity
Lower demand for structured products by investors

Less Supply
of VolaZlity

"There is no terror in the bang, only in the anZcipaZon of it." Alfred Hitchcock
VolaZlity term-structure measures the anZcipaZon of future volaZlity

1.90x

Bull Market in Fear / VIX Futures Curve (normalized by spot VIX)


2004 to Present

1.50x
1.30x

1.10x
0.90x

Jul-12

Feb-12

Dec-11

Sep-11

Jun-11

Apr-11

Jan-11

Oct-10

Jul-10

M6
M3
VIX

May-10

0.50x

Feb-10

0.70x
Mar-04
Jun-04
Sep-04
Nov-04
Feb-05
May-05
Aug-05
Oct-05
Jan-06
Apr-06
Jun-06
Sep-06
Dec-06
Mar-07
May-07
Aug-07
Nov-07
Feb-08
Apr-08
Jul-08
Oct-08
Dec-08
Mar-09
Jun-09
Sep-09
Nov-09

Vix Futures/Spot Vix

1.70x

BULL MARKET IN FEAR

Abnormally Steep VolaZlity Term Structure

Expiry

The most extreme term-structure for S&P 500 index volaZlity in two decades
reects conZnued anZcipaZon of a deaZonary collapse
Ra;o of Expected Future Vola;lity as Ra;o to Spot Vola;lity
S&P 500 op;ons

Expected Volatility as a Ratio to Spot Volatility

2.4x

2.2x
2.0x

BULL MARKET IN FEAR

Abnormally Steep VolaZlity Term Structure

VIX Index
1.8x
1.6x
1.4x
1.2x
0.08 0.17 0.25 0.33 0.42 0.50 0.58 0.67 0.75 0.83 0.92 1.00 1.08 1.17 1.25 1.33 1.42 1.50
Expiry (1=year)
Cumulative Average (1990-Mar 2012)
Bull Market of 1990s (avg.)
2009 to 2012 Bull Market in Fear

2012 YTD (avg.)


2000 to Feb 2009 (avg.)

10

Low VIX index does not mean cheap vola;lity


35

Low Volatility? Really?

VIX Futures Curve Comparison


August 2012 vs. September 2008

Forward VIX index (%)

30

BULL MARKET IN FEAR

VolaZlity is cheap and expensive at the same Zme

25

20
August 17, 2012 / Lowest VIX in 5 years

15

September 15, 2008 / Day after Lehman Bros. Bankruptcy

10
Spot

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8


11

VolaZlity spikes consistently occur a\er the end of central bank balance sheet expansion
Fed Balance Sheet Expansion and VIX index
No Fed Action
QEI
QEII
Op. Twist+LTRO(ECB)
QEIII
VIX

120%
110%

Aug 2011 Crash

50

LTRO (ECB),
Op Twist (Fed) & QEIII (Fed)

40

QEII
Flash Crash

100%

45

VIX Index (%)

Fed BS % Change since September 2008

130%

BULL MARKET IN FEAR

VolaZlity Regimes Dened by Central Banking

35

90%

30

80%

25

70%

20

60%

15
Sep-12

Jul-12

May-12

Mar-12

Jan-12

Nov-11

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Since 2008 global central banks have expanded their balance sheets by $9 trillion - enough at
money to buy every person on earth a 55'' wide-screen 3D television

12

BULL MARKET IN FEAR

Post-TraumaZc-DeaZon-Disorder (PTDD)

Tail Events are now priced as if they are standard risks

Highly unlikely events are either ignored or vastly over weighted based on our collec;ve experiences

Heart Disease
1 in 6

25%

Implied Odds of % Returns for S&P 500 index


SPX OpZons (1year)

20%

Actual from Sep 2008 to Sep 2012


Implied from Jan 1990 to Sep 2008
Implied from Sep 2008 to Sep 2012
September 2012 (average)

Cumulative Probability

Life;me odds of Dying


from these causes is 1 in 4.7(1)
Black Swan?

15%

Stroke
1 in 28

10%

Car Crash
1 in 88

5%

40%

35%

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

-35%

-40%

-45%

-50%

0%
Implied 12m %G/L in S&P 500 Index

A black swan is not dying because your parachute didnt open while skydiving. it is dying
because the guy whose parachute didnt open landed on you while you were golng
Note: Artemis calculates the implied probability distribuLon using interpolated weights from variance swap pricing. This methodology may occasionally give higher weighLngs to tails in down markets than other methods
like taking the second derivaLve of call prices, cng mixture of normal PDFs to recover prices, or cng vol models (SVI,SABR).
(1)
"LifeLme Odds of Death for Selected Causes, United States, 2007" / NaLonal Safety Council 2011 EdiLon

13

BULL MARKET IN FEAR

High Cost of Tail Risk Insurance

Fear of deaZon is not MISPLACED but it is MISPRICED


You are not smart for hedging what everyone else already knows!

40%
30%

40%-50%

20%

30%-40%

10%

20%-30%

0%

10%-20%

-5.0%
10.0%
25.0%

-20.0%

-35.0%

-50.0%

2009

2008

Low
vo
exce laZlity /
regim ss kurto low
sis
e b
Pos
2004 etween
-200

Mar t-2008 B
7
ket i
n Ta ull
il Ris
k

2010

2008

2007

2006

2006

2005

0%-10%

2004

1995
1995
1996
1996
1997
1998
1998
1999
2000
2000
2001
2002
2002
2003
2004

Cumulative Probability

50%

S&P 500 Index 12-month % Contribution to Model-Free Variance by Expected Returns


(1995 1995
to Mtarch
2012)
o 2012

Implied 12m %G/L


in S&P 500 index

Note: Artemis calculates the implied probability distribuLon using interpolated weights from variance swap pricing. This methodology may occasionally give higher weighLngs to tails in down markets than other methods
like taking the second derivaLve of call prices, cng mixture of normal PDFs to recover prices, or cng vol models (SVI,SABR).

14

BULL MARKET IN FEAR

Extreme VolaZlity-of-VolaZlity and Hyper-CorrelaZons

Fire Risk is High Today in the Forest

Higher correlaZons are kindling for violent volaZlity res (spike)


HIGHER CORRELATIONS lead to...
Correlation (60 day)
S&P 500 Sector
2000
to 2012



Correlation (0-1)

1
0.8
0.6
0.4
0.2

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2003

2002

2001

More VIOLENT VOLATILITY SPIKES

Volatility (%)

Volatility of VIX index (60 day)


2000 to 2012

2012

2011

2010

2009

2008

2007

2006

2004

2003

2002

2001

2000

2005

205
185
165
145
125
105
85
65
45

2000

15

BULL MARKET IN FEAR

Extreme VolaZlity-of-VolaZlity and Hyper-CorrelaZons

VolaZlity is a Shadow Currency in the Bull Market for Fear


$USD currency index strength = Higher VolaZlity
0.6

Correlation
of $USD Index to VIX Index

(1986 to 2012)

0.4

0.2

-0.2

-0.4

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

Note: Prior to 1990 there was not VIX index. We have subsLtuted the CBOE VXO index, the precursor to the VIX, which was available starLng in 1986.

16

How to beat a Bull Market in Fear


Hedge unknown unknowns and sell known unknowns

When the market iden;es a risk it is usually overpriced in vola;lity markets

The more we fear the le\ tail the more you should buy the right

BULL MARKET IN FEAR

VolaZlity of an Impossible Object

Tail risk pricing (both le^ and right) has been consistently late to the game

Fear is a bezer reason to buy than fundamentals

Vola;lity (fear) is an eec;ve leading indicator to inform asset alloca;on

When Risk-Free is Risky buy VolaZlity on Safety Itself!

when a bull market in fear meets a bubble in safety bet on interest rate vola;lity

17

VolaZlity markets are surprisingly bad at predic;ng future risk


When markets idenLfy a known unknown that risk tradiLonally is overblown or at
the very minimum over-hedged
Fiscal Cliff or Volatility of Volatility Cliff?

Predicted Volatility of VIX vs. Realized Vol of VIX


October 2012

240
220

Volatility of VIX (%)

200

Vola;lity of VIX was 200% on Oct 13, 2008


Maximum was 265% on Aug 29, 2011

BULL MARKET IN FEAR

Bet on unknown unknowns dont hedge known unknowns

180
160
140

120

Very
Expensive Fear

Cheap
Fear

100

US Fiscal Cli

80
60
40
11-Oct-12

6-Nov-12

3-Dec-12

28-Dec-12
25-Jan-13
Forward Period

Market Expected Volatility of VIX (local)


5yr Average Realized Vol-of-VIX
1yr Average Realized Vol-of-VIX
6mo Average Realized Vol-of-VIX

21-Feb-13

19-Mar-13

15-Apr-13

9-May-13

18

BULL MARKET IN FEAR

Bet on unknown unknowns dont hedge known unknowns

Sell known unknowns and Buy unknown unknowns


mone;ze the bull market in fear by playing the term structure

Fear Arbitrage

1.6x

Forward Volatility Term Structure

(Vola7lity futures & Op7ons, SPX Vol Term Structure)

1.5x
1.4x
1.3x
1.2x
1.1x

Unknown
Unknown Crash

1.0x
Month 1

Month 2

Month 3

Known-Unknown Crash

Month 4

Forward V olatility (October 2012)

Month 5

Month 6

Month 7

Month 8

Historical Average Forward V olatility (since 2004)

19

Role of the trader is not so much to predict the future but to idenZfy mispriced risk
The opLons market is consistently late to the game in pricing both the right and leh tails
Cross Asset Implied Probability DistribuZon Comparison (2008 pre-crisis to 2012)
Variance Swap WeighZng { SPY, EFA, EEM, TLT, IEF, HYG, USO, GLD }

2012

Pre-Crisis 2008

60%
60%

Right
Tail
Bias

Probability Of Return

50%
40%
30%
20%
10%

40%
40%
30%
30%
20%
20%

Expected 1yr Asset Return Distribution


Expected 1yr Asset Return Distribution
by Standard Deviation (Historical)
by Standard Deviation (Historical)

Note: Artemis calculates the implied probability distribuLon using interpolated weights from variance swap pricing. This methodology may give higher weighLngs to tails in down markets than more tradiLonal methods
like taking the second derivaLve of call prices, cng mixture of normal PDFs to recover prices, or cng vol models (SVI,SABR).

Gold
Oil
Gold
HY Bonds
Oil
UST
10yr
HY
Bonds
UST 130yr
0yr
UST
Intl. 3E0yr
quity (Emerg)
UST
Intl. EEquity
quity (Emerg)
(Dev)
Intl.
US EEquity
Intl.
quity (Dev)
US Equity

+2.5
+2.5

+2.0
+2.0
+1.5
+1.5

+1.0
+1.0
+0.5
+0.5

+0.0
+0.0

-0-.5
0.5

-1-.0
1.0

-1-.5
1.5

-2-.0
2.0

-2-.5
2.5

Gold
Oil
10%
HY Bonds
10%
UST 10yr
UST 30yr
Intl. Equity (Emerg)
Intl. Equity (Dev)
0%
US Equity
0%

-3-.0
3.0

Expected 1yr Asset Class Return Distribution


by Standard Deviation (Historical)

+2.5

+2.0

+1.5

+1.0

+0.5

+0.0

-0.5

-1.0

-1.5

-2.0

-2.5

-3.0

0%

Lel
tail
bias

50%
50%
Probability
Of ORf eturn
Probability
Return

60%

BULL MARKET IN FEAR

The more people fear the LEFT TAIL the more you should buy the RIGHT and vice versa

20

Maybe it is correct to buy tail risk insurance ... but is everyone just hedging the
wrong tail?

Mirror Reflection: Deflation vs. Hyperinflation

Cumulative Probability Weighting

20%

15%

10%

S&P 500 Probability Distributions in different Regimes of Risk


1-year Gain-Loss%

BULL MARKET IN FEAR

The more people fear the LEFT TAIL the more you should buy the RIGHT

Implied from March 2012 SPX options


Simulated from in 2013-2022 Hyperinflationary Model (1 scenario of 10k)

Future?

5%

0%
-50% -43% -35% -28% -20% -13% -5% +3% +10% +18% +25% +33% +40% +48%
One Year Gain/Loss % in S&P 500 index
Note: Artemis created a model to simulate the behavior of the S&P 500 index and volaLlity during an inaLonary shock. The model is not intended to be a predicLon of the future but is merely a rudimentary stochasLc-
based method to understand what modern markets may look like in rampant inaLon. The simulaLon runs 10,000 price scenarios for the S&P 500 index over 10 years modeling daily stock price behavior using a
generalized Wiener process (Wiener.. not Weimar) and a drih rate that assumes linkages between annual CPI and equity performance. We assume inaLon rises sharply from current levels of 2.87% in 2012 to 26% by
2015 and stays elevated at that level unLl 2017 (20% a year overall). The average volaLlity shihs are based upon assumpLons regarding equity return to variance parameters observed in prior inaLonary episodes (1970s
US & 1920s Germany). The simulaLon shows annualized SPX returns for the decade at +9.94% but adjusted for inaLon this drops to -9.8%.

21

It is hard to have a bear market in a bull-market for fear

VolaZlity term-structure is an eecZve leading indicator to inform equity exposure

It pays to have exposure to stocks when markets are hedged!


S&P 500 index poroolio exposure based on Vol Slope
1996 to 2012

600
550
500

Growth of $100

450

Period of Steep Vol Slope (1yr VarK / VIX > 1.10)


S&P 500 Index

BULL MARKET IN FEAR

Fear over Fundamentals

Tactical Allocation to S&P 500 during periods with Steep Vol Slope

400
350
300
250
200
150

100
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Note: A steep volaLlity surface is described as a 1yr variance swap K to VIX index raLo that is greater than the historic average. Assumes any weekly period of Fed BS expansion.

2008

2009

2010

2011

2012

22

When the Bull Market in Fear meets a Bubble in Safety a short equity opZon
posiZon and risk-free UST bond have similar risk-to-reward payos!
Ecient FronZer / Risk to Reward Comparison
Long Dated UST Bond vs. 1yr OTM Short Puts (collateralized)
Return / Yield

30yr UST
Bond

BULL MARKET IN FEAR

Risk Free Assets are Risky

SPX Short Put


(Strike @-25% OTM)

10yr UST
Bond

Risk
nrealized Loss
Loss
Stress
Test
Scenario
Risk // UUnrealized
in in
Stress
Test
Scenario
SPX Put
Stress Test
UST Bond
Stress Test

SPX -9% to -14%

68% to 33% probability

SPX -25%
13% chance

Rates 100bps to 200bps


68% to 33% probability

SPX -50%

2% probability

Rates 320bps to 600bps


13% to 2% probability

Note: All data as of September 14, 2012. EsLmated unrealized loss on posiLon given stress test scenario. Historic probability data based on period of 1960 - 2012 for the UST bonds and 1950 to 2012 for the S&P 500 index.
OpLon pricing based on esLmated local volaLlity shihs, however actual shihs may dier from esLmates during a real crash depending. All stress tests are assumed to occur close to the purchase period of the instrument.
Unrealized losses may dier closer to maturity.

23

BULL MARKET IN FEAR

Risk Free Assets are Risky

When risk-free is risky it is Zme to buy volaZlity on safety itself


Higher interest rate vola;lity can be realized in dea;on and ina;on
Interest Rate Volatility is Low

250

... and a better bargain on a forward basis than equity vol

Merrill Lynch MOVE Index = VIX for UST Bonds


Weighted Volatility of 2yr,5yr,10yr & 20yr UST

200

150

100

Oct-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Aug-11

Jun-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Source: Bloomberg

Dec-08

Oct-08

50

24

Modern nancial markets are an impossible object


VolaZlity of an impossible object is our changing percepZon of risk

IllustraLon by Brendan Wiu based on concept by Christopher Cole

BULL MARKET IN FEAR

VolaZlity of an Impossible Object

25

the next Unknown Unknown Crash


What is not priced into markets that will seem as obvious in 10 years as it is
laughable today?

Bull Market in Fear is prepared for yesterdays crash


you want to be hedged for what happens tomorrow
Fracture between the fundamental
and the abstract is a source of great risk

BULL MARKET IN FEAR

VolaZlity of an Impossible Object

Today everyone is afraid of the next 2008


I am afraid of the next 1987. possibly for stocks
but more likely bonds

26

Post-Modern Economy & Simulacra and SimulaZon

Baudrillard recalls Borges fable about cartographers of a great empire who drew a detailed map
When the empire collapses the map is accepted as truth and the empire forgosen
In the postmodern economy market expecta;ons are more important to fundamental growth
than the reality of supply and demand the market was designed to mimic













What Baudrillard calls the desert of the real is what Bernanke idenZes as the wealth eect

BULL MARKET IN FEAR

Post-Modern Economy



The real economy is not slave to the shadow
banking system our economy IS the

shadow banking system the empire is gone and we live in the abstrac;on

27

VolaZlity is the perfect post-modern asset class for our existenZal


economic future

VolaZlity
Markets

DerivaZ
ve
Market
s

VolaZlity

Financi
al
Market
s

BULL MARKET IN FEAR

VolaZlity can be more than just FEAR


Economic
Reality

Fiat
Currency

28

VolaZlity as a concept is widely misunderstood. VolaZlity is not fear. VolaZlity is not the
VIX index. VolaZlity is not a staZsZc or a standard deviaZon, Black-Scholes input, or any
other number derived by abstract formula.
VolaZlity is no dierent in markets than it is to life.

VolaZlity is an instrument
of truth

BULL MARKET IN FEAR

Truth and VolaZlity

Regardless of how it is measured vola;lity reects the dierence between the world
as we imagine it to be and the world that actually exists


We will only prosper if we relentlessly search for nothing but the truth, otherwise
the truth will nd us through vola;lity

the Truth is that Capitalism can save us
but First We Must Find a Way to Save Capitalism


29

Christopher
Contact
InformaZon
Cole, CFA General Partner and Founder

Artemis Research:
Vola7lity of an Impossible Object: Risk, Fear, and Safety in Games of Percep7on
Vola7lity at Worlds End: Dea7on, Hyperina7on and the Alchemy of Risk, March 30, 2012
Figh7ng Greek Fire with Fire: Vola7lity Correla7on, and Truth, September 30, 2011
Is Vola7lity Broken? Normalcy Bias and Abnormal Variance, March 30, 2011
The Great Vega Short- vola7lity, tail risk, and sleeping elephants, January 4, 2011
Unied Risk Theory - Correla7on, Vol, M3 and Pineapples, September 30, 2010

Artwork:
"Vola7lity at World's End" by Brendan Wiu 2012 / copyright owned by Artemis Capital Management LLC
"VolaLlity of an Impossible Object" by Brendan Wiu / Concept by Christopher Cole 2012 / copyright owned by Artemis Capital Management LLC
Jack-o-Lantern Istock photo / used based on purchase of rights
Ocean Waves Istock photo / used based on purchase of rights
"Odysseus facing the choice between Scylla and Chrybdis" by Henry Fuseli 1794 / public domain
"Penrose Triangle, Devils Turning Fork & Neckers Cube Derrick Coetzee / Public Domain
"Liberty Leading the People" by Eugne Delacroix 1830 / public domain
Ocean wave pictures provided by istockphoto.com

Reference Material:
Simulacra and Simula7on by Jean Baudrillard / University of Michigan / 1994
"A Tale of Two Indices" by Peter Carr & Liuren Wu December 22, 2005
VIX Deriva7ves: A Poor Prac77oners Model Maneesh Deshpande / May 19 2011
Understanding VIX Futures and Op7ons Dennis Dzekouno; Futures Magazine/ August 2010
The Vola7lity Surface: A Prac77oners Guide. Jim Gatheral / John Wiley and Sons, Hoboken, NJ, 2006
"Think Fast and Slow" by Daniel Kahneman / Farrar, Staus and Giroux 2012
Op7ons, Futures, and Other Deriva7ves John C. Hull, Filh Edi7on; Pren7ce Hall 2003
"Life7me Odds of Death for Selected Causes, United States, 2007" / Na7onal Safety Council 2011 Edi7on
Vola7lity Trading Evan Sinclair, Wiley Trading 2008
"Dying of Money: Lessons of the Great German and American Ina7ons" by Jens O. Parsson / Wellspring Press 1974
"Economics of Ina7on; A Study of Currency Deprecia7on in Post-War Germany" by Constan7no Bresciani-Turroni Out of Print / 1968
Variance Swaps Peter Allen, Stephen Einchcomb, Nicolas Granger; JP Morgan Securi7es / November 2006
"Laughter in the Dark - The Problem of the Vola7lity Smile" by Emanuel Derman May 26, 2003
Robust Hedging of Vola7lity Deriva7ves Roger Lee & Peter Carr; Columbia Financial Engineering Seminar / September 2004
More than you Ever Wanted to Know About Vola7lity Swaps Kresimir Demeter, Emanual Derman, Michael Kamal & Joseph Zou; Goldman Sachs / March 1999
The Performance of VIX Op7on Pricing Models: Empirical Evidence Beyond Simula7on Zhiguang Wang; Florida Interna7onal University / April 2009
Recent Developments in VIX Exchange Traded Products Maneesh Deshpande/ April 3, 2012
"Dea7on: making sure 'it' doesn't happen here" by Ben S. Bernanke (speech) / US Federal Reserve November 2002

"US Op7ons Strategy TVIX Explosion Drives Vol-of-Vol Higher" Deutsche Bank February 23, 2012
"Unknown Unknowns: Vol-of-Vol and the Cross Sec7on of Stock Returns" Guido Baltussen, Sjoerd Van Bekkum and Bart Van Der Grient / Erasmus School of Economics & Robeco Quan7ta7ve
Strategies/ July 30, 2012
Deni7on of "Impossible Object" / Wikipedia / hQp://en.wikipedia.org/wiki/Impossible_object

BULL MARKET IN FEAR

Reference Material & Acknowledgements

30

Christopher
Contact
InformaZon
Cole, CFA General Partner and Founder

Artemis Vega Fund L.P.


Artemis Capital Management, L.L.C.
520 Broadway, Suite 350
Santa Monica, CA 90401
info@artemiscm.com
www.artemiscm.com

Christopher Cole, CFA
Managing Partner & Poroolio Manager
(310) 496-4526 phone
(310) 496-4527 fax
c.cole@artemiscm.com

BULL MARKET IN FEAR

Artemis Capital Management Contact InformaZon

Key InformaZon/ Biography


Christopher Cole, CFA
Managing Partner & Poroolio Manager / Artemis Capital Management LLC
Christopher R. Cole, CFA is the founder of Artemis Capital Management LLC and the porwolio manager of the
Artemis Vega Fund LP. Mr. Coles core focus is systema7c, quan7ta7ve, and behavioral based trading of
exchange-traded vola7lity futures and op7ons. His decision to form a fund came aler achieving signicant
proprietary returns during the 2008 nancial crash trading vola7lity futures. His research leQers and vola7lity
commentaries have been widely quoted including by publica7ons such as the Financial Times, Bloomberg,
Interna7onal Financing Review, CFA Magazine, and Forbes. He previously worked in capital markets and
investment banking at Merrill Lynch. During his career in investment banking and pension consul7ng he
structured over $10 billion in deriva7ves and debt transac7ons for many high prole issuers. Mr. Cole holds
the Chartered Financial Analyst designa7on, is an associate member of the NFA, and graduated Magna Cum
Laude from the University of Southern California.

31

THIS IS NOT AN OFFERING OR THE SOLICITATION OF AN OFFER TO PURCHASE AN INTEREST IN ARTEMIS VEGA FUND,
L.P. (THE FUND). ANY SUCH OFFER OR SOLICITATION WILL ONLY BE MADE TO QUALIFIED INVESTORS BY MEANS OF
A CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (THE MEMORANDUM) AND ONLY IN THOSE
JURISDICTIONS WHERE PERMITTED BY LAW. AN INVESTMENT SHOULD ONLY BE MADE AFTER CAREFUL REVIEW OF
THE FUNDS MEMORANDUM. THE INFORMATION HEREIN IS QUALIFIED IN ITS ENTIRETY BY THE INFORMATION IN
THE MEMORANDUM.
AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. OPPORTUNITIES FOR
WITHDRAWAL, REDEMPTION AND TRANSFERABILITY OF INTERESTS ARE RESTRICTED, SO INVESTORS MAY NOT HAVE
ACCESS TO CAPITAL WHEN IT IS NEEDED. THERE IS NO SECONDARY MARKET FOR THE INTERESTS AND NONE IS
EXPECTED TO DEVELOP. NO ASSURANCE CAN BE GIVEN THAT THE INVESTMENT OBJECTIVE WILL BE ACHIEVED OR
THAT AN INVESTOR WILL RECEIVE A RETURN OF ALL OR ANY PORTION OF HIS OR HER INVESTMENT IN THE FUND.
INVESTMENT RESULTS MAY VARY SUBSTANTIALLY OVER ANY GIVEN TIME PERIOD.
CERTAIN DATA CONTAINED HEREIN IS BASED ON INFORMATION OBTAINED FROM SOURCES BELIEVED TO BE
ACCURATE, BUT WE CANNOT GUARANTEE THE ACCURACY OF SUCH INFORMATION.



LEGAL DISCLAIMER

Legal Disclaimer

32

An investment in the Partnership and strategies discussed in this document involve a number of signicant risks. For a full list of potenLal risk factors please review the
Oering Memorandum. ProspecLve Limited Partners should read the enLre Memorandum and the Partnership Agreement and consult with their own advisers before
deciding whether to invest in the Partnership. In addiLon, as the Partnerships investment program develops and changes over Lme, an investment in the Partnership may
be subject to addiLonal and dierent risk factors. ProspecLve investors should also consult with their own nancial, tax and legal advisors regarding the suitability of this
investment. Artemis Capital Management, L.L.C. does not guarantee returns and investors bear the risk of losing a substanLal porLon of or potenLally their enLre
investment.

DISCLOSURE

General Disclosure Statement

All 2009 performance numbers quoted within this document are derived from nancial statements that were audited by Spicer Jeries. Proprietary trading results for
White Fox, LLC (the Proprietary Account) are presented within this document that were veried by Spicer Jeries. The Principal of the General Partner, Christopher R.
Cole, used the Proprietary Account as a vehicle to incubate the investment strategy of the Partnership with personal funds as well as those of close family members. Note
that no management or performance fees were charged to the Proprietary Account proled. Accordingly, the Pro Forma Performance presented in this document includes
imposiLon of a 2% Management Fee and 20% Performance AllocaLon (in line with those charged against the Partnership).Past performance is not indicaLve of future
returns.

Commodity Pool Operator Disclosure Statement


YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE
AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET
ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR
ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.

FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR
THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETIONS OR EXHAUSTION OF THEIR ASSETS. THE
OFFERING MEMORANDUM CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AND A STATEMENT OF THE PERCENTAGE RETURN
NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT .

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THE OFFERINGMEMORANDUM, INCLUDING A
DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT.

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED
OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT
OR DIMINISHED PROTECTIONS TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE
ENFORCEMENT OF THE RULES OR REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE
EFFECTED.

33