I N V E S T O R & M E D I A K I T
1 9 t h o f S e p t e m b e r 2 0 1 3 | F a s a n a r a C a p i t a l L t d . | 5 5 G r ...
DISCLAIMER
2
 This document issued by Fasanara Capital Ltd. (“Fasanara”) and is for distribution to professional clients ...
DISCLAIMER|Fasanaraon
3
 Please read these Terms and Conditions of Use (“Terms and Conditions”) carefully. The FASANARA T...
DISCLAIMER|Fasanaraon
4
 Certain of the statements contained herein may be statements of future expectations and other fo...
SYNOPSIS
September2013
5
TAKE-AWAY POINTS
 We believe MARKETS remain structurally FRAGILE to VAR-shocks and any exogenous factor could take them d...
PORTFOLIO POSITIONING
7Strictly Confidential | Not for Distribution
H E D G I N G B O O KV A L U E B O O K
 As the market...
FOCUS TRADES
8Strictly Confidential | Not for Distribution
H E D G I N G B O O K : E U R O P E R I S KH E D G I N G B O O ...
BUBBLE MARKETS ARE GAPPING MARKETS
9
OUR TAKES ON LAST NIGHT FED’S DECISION
 PRE-FED ANNOUNCEMENT:
 On June 28th we wrote: “If we are right about the LACK OF...
11
Strictly Confidential | Not for Distribution
MOTIVES FOR BERNANKE’S ERRATIC PATH
 What may have convinced Bernanke to ...
TOPPY MARKETS ARE GAPPING MARKETS
12
Strictly Confidential | Not for Distribution
 Liquidity-driven markets are VULNARABL...
13
Strictly Confidential | Not for Distribution
RISK PARITY: ADDING VAR SHOCK ON RATES
 Risk parity is an asset allocatio...
MARKETS REMAIN STRUCTURALLY FRAGILE
 We continue to believe that MARKETS ARE STRUCTURALLY FRAGILE to VAR-SHOCKS and to su...
OVER-LEVERAGE IN THE SYSTEM
15Strictly Confidential | Not for Distribution
H E D G I N G B O O K : B U B B L E M A R K E T...
OVER-LEVERAGE IN THE SYSTEM
16Strictly Confidential | Not for Distribution
H E D G I N G B O O K : B U B B L E M A R K E T...
OVER-LEVERAGE IN THE SYSTEM
17Strictly Confidential | Not for Distribution
H E D G I N G B O O K : B U B B L E M A R K E T...
18
Should the bull market reverse, fixed income
will be much less liquid than investors expect
LOW LIQUIDITY / LOW INVENTO...
BINARY EVENTS & VOLATILITY AHEAD
19
BINARY EVENTS & VOLATILITY AHEAD
 As we remain focused on TAIL RISKS, against which we design the portfolio to be over-he...
BINARY EVENTS & VOLATILITY AHEAD
 Rising GDP expectations could justify a 4% on 10yrs Govies
21
Strictly Confidential | N...
BINARY EVENTS & VOLATILITY AHEAD
22
Strictly Confidential | Not for Distribution
Source: Street Talk Live blog
R I S I N G...
BINARY EVENTS & VOLATILITY AHEAD
 It is not just in the U.S. that rates are increasing. European bond spreads are surging...
 CENTRAL BANKS’ EXPANSIONARY POLICIES: in several occasions in the past, the FED and other monetary authorities
have atte...
WHY TO STAY BEARISH & HEDGE TAIL RISKS!
 Over the past 5 years the US has generated $1 of GDP for every $18 of DEBT, lead...
26
M O N E T A R Y B A S E E X P A N S I O N V S . M O N E Y M U L T I P L I E R A N D V E L O C I T Y O F M O N E Y C O L...
EMs / COMMODITIES VS. G4 COUNTRIES
 As explained already when describing the relationship between the Bubble Chain and th...
CIO’ s CORNER
Trades’Highlights
28
TRADES’ HIGHLIGHTS
29Strictly Confidential | Not for Distribution
H E D G E V S S & P D O W N S I D E R I S K
 As outline...
TRADES’ HIGHLIGHTS
30Strictly Confidential | Not for Distribution
H E D G I N G B O O K : B U B B L E M A R K E T i n E Q ...
TRADES’ HIGHLIGHTS
31Strictly Confidential | Not for Distribution
H E D G I N G B O O K : B U B B L E M A R K E T i n E Q ...
TRADES’ HIGHLIGHTS
32Strictly Confidential | Not for Distribution
H E D G I N G B O O K : E U R B R E A K - U P a n d R E ...
TRADES’ HIGHLIGHTS
33Strictly Confidential | Not for Distribution
T A C T I C A L B O O K : E U R O S T O X X L O N G
 As...
TRADES’ HIGHLIGHTS
34Strictly Confidential | Not for Distribution
T A C T I C A L B O O K : E U R O S T O X X L O N G
Upsi...
TRADES’ HIGHLIGHTS
35Strictly Confidential | Not for Distribution
T A C T I C A L B O O K : L / S P O T A S H P L A Y
 On...
TRADES’ HIGHLIGHTS
36Strictly Confidential | Not for Distribution
T A C T I C A L B O O K : L / S P O T A S H P L A Y
TRADES’ HIGHLIGHTS
37Strictly Confidential | Not for Distribution
T A C T I C A L B O O K : L O N G E M s / C o m m o d i ...
TRADES’ HIGHLIGHTS
38Strictly Confidential | Not for Distribution
I N T E R E S T R A T E S V S . E Q U I T Y
 Positive C...
39
Strictly Confidential | Not for Distribution
TRADES’ HIGHLIGHTS
Option
using
10cms
Strike(s) Barrier Expiry Offer Vanil...
RESEARCH & MEDIA LIBRARY
40
41
Strictly Confidential | Not for Distribution
F A S A N A R A R E S E A R C H
Since September 2011, we have published In...
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Strictly Confidential | Not for Distribution
P R E S S
 Fasanara Opportunities Fund Profiled:
Article
 The Big Pictur...
ABOUT FASANARA CAPITAL
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 Fasanara Capital Ltd.: Fasanara is an employee owned alternative asset management company headquartered in London
and au...
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 Fasanara targets mid-teens annual returns by investing in alpha generating ideas that are uncorrelated to investment
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CONTACT INFORMATION
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Fasanara Outlook Sept Investors Presentation 2013 | Artificial Markets are Structurally Fragile… Stay Hedged!

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Fasanara Outlook Sept Investors Presentation 2013 | Artificial Markets are Structurally Fragile… Stay Hedged!

  1. 1. I N V E S T O R & M E D I A K I T 1 9 t h o f S e p t e m b e r 2 0 1 3 | F a s a n a r a C a p i t a l L t d . | 5 5 G r o s v e n o r S t r e e t - L O N D O N I N V E S T M E N T O U T L O O K A r t i f i c i a l M a r k e t s a r e S t r u c t u r a l l y F r a g i l e … S t a y H e d g e d !Authorized and Regulated by the Financial Conduct Authority Presented by: Francesco Filia | Chief Investment Officer SEPTEMBER 2013
  2. 2. DISCLAIMER 2  This document issued by Fasanara Capital Ltd. (“Fasanara”) and is for distribution to professional clients and eligible counterparties only. Fasanara is authorised and regulated by the Financial Conduct Authority ("FCA"). The information contained in this document is strictly confidential and may not be reproduced, further distributed or published by any recipient without prior written permission by Fasanara.  This document does not constitute or form part of any offer to issue or sell, or any solicitation of an offer to subscribe or purchase, any investment nor shall it or the fact of its distribution form the basis, or be relied on in connection with, any contract.  The Funds are not regulated collective investment schemes for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the "Act") and are exempt from the restriction in section 238 of the Act on the communication of an invitation or inducement to participate in a collective investment scheme on the grounds that such information is communicated to and/or directed at only those persons who are categorised as professional clients or eligible counterparties (within the meaning of the FSA Rules) in relation to the Funds. The investments and investment services to which this publication relates are only available to persons with such a categorisation and other persons should not act or rely on it. In particular, any investment or investment service to which this publication relates is not intended for persons who are retail clients and will not be made available to retail clients. Please refer to the offering document for further details of the financial and other risks involved in connection with investments in such funds.  Investors in the Funds will not benefit from the rules and regulations made under the Act for the protection of investors, nor from the Financial Services Compensation Scheme. Shares in the Funds are not dealt in or on a recognised or designated investment exchange for the purposes of the Act, nor is there a market maker in such shares, and it may therefore be difficult for an investor to dispose of his shares otherwise than by way of redemption.  Wilshire® is a registered service mark of Wilshire Associates Incorporated, Santa Monica, California. All other trade names, trademarks, and/or service marks are the property of their respective holders. Wilshire is not an affiliate of any member company of Fasanara Capital Ltd. Strictly Confidential | Not for Distribution
  3. 3. DISCLAIMER|Fasanaraon 3  Please read these Terms and Conditions of Use (“Terms and Conditions”) carefully. The FASANARA Twitter and YouTube accounts (“Sites”) are maintained by Fasanara Capital Ltd. (“Fasanara”), an investment adviser authorised and regulated by the Financial Conduct Authority ("FCA").  Fasanara is not responsible for the terms of use or privacy or security policies at this Site or other third party sites that may be linked to by this Site or other Twitter pages. You use any third party sites and materials at your own risk.  The information posted to this Site by Fasanara represent the current opinions of the manager and such opinions are subject to change without notice. These posts have been provided for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the market is subject to certain risks. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. There is no guarantee that any investment strategy discussed on this Site will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.  Fasanara reserves the right, at its discretion, to change, modify, add, or remove portions of these Terms and Conditions at any time. Your continued use of the Site following reasonable notice of such modifications will be conclusively deemed acceptance of any changes to these Terms and Conditions. You agree that notice of changes to these Terms and Conditions posted on the Site constitutes reasonable and sufficient notice. At all times, you are bound by the then-current version of the Terms and Conditions and of all applicable laws.  The Content of this Site is available for informational purposes only. The posting of Content and access to this Site does not constitute, either explicitly or implicitly, any provision of services or products by Fasanara.  Nothing contained on this Site constitutes an offer, solicitation or recommendation regarding any investment management product or service, or the offer to sell or the solicitation of an offer to buy any security; nor shall any such services be provided, or securities be offered or sold, in any jurisdiction in which such an offer, solicitation, provision or sale would be unlawful. All Site Content is subject to applicable statutes and regulations. Any potential investor should satisfy himself that an investment in any Fasanara’s product is permissible under the rules and regulations of his or her domicile. The Site is not directed to any person in any jurisdiction where (by reason of that person's nationality, residence or otherwise) the publication or availability of the Site is prohibited. Persons in respect of whom such prohibitions apply must not access the Site. Strictly Confidential | Not for Distribution
  4. 4. DISCLAIMER|Fasanaraon 4  Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward- looking by reason of context, the words “may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue” and similar expressions identify forward-looking statements. References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. Fasanara products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included. The matters discussed herein may also involve risks and uncertainties described from time to time in the respective Fasanara’s documents. The company assumes no obligation to update any forward-looking information contained herein.  Although Fasanara has taken reasonable care to ensure that the information contained within this Site is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made as to its accuracy, reliability or completeness by Fasanara. Opinions and any other contents at the Site are provided by Fasanara for personal use and informational purposes only and are subject to change without notice. Nothing contained on this Site constitutes investment, legal, tax or other advice and is not to be relied on in making an investment or other decision.  The information and opinions contained on this Site, including hyperlinks or references to other sites, are provided ‘as is’ without any warranty of any kind, either expressed or implied, to the fullest extent permissible pursuant to applicable law. You are responsible for evaluating the adequacy, accuracy, reliability, merchantability, non-infringement, completeness of any information or the content available on the Site or fitness for any particular purpose with respect to the site or any of its content. Fasanara assumes no responsibility for, and makes no warranties that, functions contained on this Site will be uninterrupted or error-free, that defects will be corrected, or that this Site or the servers that make it available will be free of viruses or other harmful components.  Neither Fasanara nor any of their respective affiliates, directors, officers, registered representatives or employees, nor any third party vendor, will be liable or have any liability, whether in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, punitive or special damages arising out of or in any way connected with your access or use or inability to access or use the Site or reliance on the Content, or any failure of performance, interruption, defect, delay in transmission, computer viruses or other harmful components, or line or system failure associated with the Site, regardless of our knowledge thereof. Strictly Confidential | Not for Distribution
  5. 5. SYNOPSIS September2013 5
  6. 6. TAKE-AWAY POINTS  We believe MARKETS remain structurally FRAGILE to VAR-shocks and any exogenous factor could take them down: Among the driving forces: a) over-leverage in the system; b) low liquidity / low inventories; c) markets’ blind optimism  TAPERING: the only un-priced scenario was a postponement / lite-tapering, which will lead to a “SHORT-LIVED” RELIEF RALLY… but Tapering will eventually HAVE TO HAPPEN  We see the possibility of a mild nominal rally in Q4 2013, but down the line the tapering’s side effects will materialize  RATES: in our opinion RATES remain the BIGGEST CATALYST to EQUITY UNDER-PERFORMANCE  A) tapering, while delayed, it will come no matter what; B) EMs might be forced to sell Treasuries to stem a currency crisis; C) rising expectations on GDP could easily justify 4% on 10yrs Govies  CHINA: the key mounting issue for China is its Corporate Sector, whose leverage is 125%+ of GDP  Growth numbers below 7% have the potential to lit the fuse on corporate China excess credit  EUROPEAN ELECTIONS: beyond Germany, possible new elections in Italy represent a “FAT TAIL” event… not even such “tail” event as its probability tops 40%  A) Italian bonds are well inside bubble territory; B) Italian equities are historically cheap… but not cheap enough to weather a tail event  The CIO’s CORNER: 6 Strictly Confidential | Not for Distribution VALUE BOOK FLAT Remains light, as we see a risk of 10%+ correction over the medium term TACTICAL BOOK EXPANDING in absence of sustainable carry generation in the Value Book  Tactical Long EuroStoxx – taper- lite theme  Tactical Long single stocks linked to EMs / Commodities - catch up theme  L / S position in the Potash market HEDGING BOOK ACTIVE This is where we see MOST OPPORTUNITIES  Short S&P / Long VIX  Long Credit Curve Flatteners  Short EUR  Long Inter-banking spreads  Long currency pegs  Short JGB rates / short JPY  Short AUD
  7. 7. PORTFOLIO POSITIONING 7Strictly Confidential | Not for Distribution H E D G I N G B O O KV A L U E B O O K  As the market misprices the potential for increased realized volatility, we continue to identify ATTRACTIVE HEDGING OPPORTUNITIES  To date we have EXPENSED 4% of the PORTFOLIO in premiums to hedge against: a) DOWNSIDE RISK on the S&P; b) further WEAKNESS in the EUROZONE, and against a; c) CHINA HARD LANDING scenario  All current option structures have been engineered to provide LONG DATED PROTECTION & HIGH MULTIPLIERS  As we believe that MARKETS are TOPPY and at RISK of a STEEP CORRECTION, we keep our VALUE BOOK FLATTISH  Our current limited allocation to long positions targets SPECIAL SITUATIONS offering ASYMMETRIC PROFILES vs. RISKS  We will review our positioning in the Value Book when the REAL WORLD and the FINANCIAL MARKETS tighten; or when MARKETS MOVE SIDE-WAYS for a LONG ENOUGH period of time  In fact, a century worth of data does NOT support being long at current BUBBLE levels; neither in CREDIT nor in EQUITY  CREDIT is remindful of 2007, with the only exception that the bubble is sustained by Central Banks this time around (instead of Investment Banks)  EQUITY is remindful of conditions seen in 2007, but also in 2000, 1987, 1973, 1929… all of which were followed by market crashes  We observe that over the last century there has NEVER been such a HIGH level of RISK for such LOW RETURNS T A C T I C A L B O O K  This book employs MOMENTUM DRIVEN STRATEGIES  As of the 31st of August the Tactical Book represents app. 30% of OVERALL PORTFOLIO  We however EXPECT TO INCREASE this TACTICAL EXPOSURE in September / October, and will continue to do so at least until a more sustainable carry generation can be provided by the Value Book
  8. 8. FOCUS TRADES 8Strictly Confidential | Not for Distribution H E D G I N G B O O K : E U R O P E R I S KH E D G I N G B O O K : S & P P U T S  We maintain our BEARISH VIEW on EUROPE and the EUR… although we recognize that such view make take time to materialize  To express such view, without worrying about BURNING CASH and having TIGHT TIME FRAMES, we have used the Itraxx  In fact, the Itraxx curve allows to structure a LONG-DATED and INEXPENSIVE HEDGE against a number of bearish European scenarios  We believe that MARKETS are sort of TOPPY, EXPENSIVE vis- à-vis the fundamentals and potentially at RISK of a STEEP CORRECTION .. particularly in the most expensive markets  To HEDGE the portfolio vs S&P DOWNSIDE RISK, while not burning too much cash on expensive optionality, we have opted for the following strategy:  BUY SPX put, strike 1650, expiry 21st September and 16th of October, for 120% of the overall portfolio  SELL VIX put, strike 14%, expiry 21st September and 16th of October, on 14% of the overall portfolio T A C T I C A L B O O K : E U R O S T O X X L O N G  As written in our Sept. 3rd Outlook, in anticipation of a mild Tapering, we believe in a SHORT-LIVED RALLY, across both, equity and bond markets  Against this background, the European equity markets is one of the cheapest to play a short-lived reflation story. Such rally might also be supported by a breakout / acceleration of key resistance levels  We have played this theme via tactical EUROSTOXX long position. In fact, the European equity market is one of the cheapest to play a short-lived REFLATIONARY story  In executing the trade above we have opted to use optionality, on safe levels T A C T I C A L B O O K : L / S P O T A S H P L A Y  On the 30th of July, OAO Uralkali, one of the largest potash producers decided to BREAK AWAY from joint venture marketing CARTEL Belarusian Potash Company (“BPC”)  Uralkali’s split from BPC is expected to DRIVE DOWN global POTASH PRICES as the company shifts to a higher-volume production model, with prices expected to settle at around $350/tonne  While this decision might prove economically rational for Uralkali, as its low-cost position means they can cut prices, maximise production, and maintain gross profit, it is considered BAD NEWS for higher-cost producers such as K+S  We initiated (then successfully closed) a L Uralkali / K+S position
  9. 9. BUBBLE MARKETS ARE GAPPING MARKETS 9
  10. 10. OUR TAKES ON LAST NIGHT FED’S DECISION  PRE-FED ANNOUNCEMENT:  On June 28th we wrote: “If we are right about the LACK OF GROWTH being the elephant in the room, then BERNANKE WILL BE NEXT CONFIRMING QE AND DELAYING TAPERING, with equity markets going up on inflationary policies resuming in contrast to current expectations of tapering by Q3 and exiting by mid-2014… In conclusion, we plan to remain flat to short the markets over the summertime, and potentially go long sometimes after that“  On Sept. the 3rd we reiterated: “Tapering may get POSTPONED by a few months, leading to a SHORT-LIVED, RELIEF RALLY.So much for the potential nominal rally we see possible in Q4”.  In anticipation of the FED announcement, we POSITIONEDTHE PORTFOLIO TACTICALLY LONG  FED ANNOUNCEMENT: *FED REFRAINS FROM QETAPER, KEEPS MONTHLY BUYING AT $85 BLN *FED: RISE IN MORTGAGE RATES, FISCAL POLICY RESTRAIN GROWTH *FED: `TIGHTENINGOF FINANCIAL CONDITIONS' COULD SLOW GROWTH *MOST FED OFFICIALS SEE FIRST INTEREST-RATE RISE IN 2015  THE BOTTOM LINE:  The reason why we expected Bernanke to delay tapering or activate a “lite-taper”, had to do with our own SKEPTICISM around the QUALITY of the GDP GROWTH and its sustainability  We view yesterday’s events as the confirmation of our assumptions on REAL ECONOMIC ACTIVITY, in contrast to the broader market consensus. The FED seems to believe that extraordinary measures are still indeed needed. GDP growth is weak and shallow at best, far insufficient to fund the huge funding gap created by additional debt inherited from QEs policies  We treat yesterday’s events as NEGATIVE for global markets in the medium term… in contrast to market consensus, which led to a strong market’s rally. The market MAY and SHOULD realise that at some point down the line. Such realisation should lead to the steep re-pricing that we expect (10-20% downside on S&P, possibly digitally). We therefore plan to stay FULLY HEDGED! 10 Strictly Confidential | Not for Distribution
  11. 11. 11 Strictly Confidential | Not for Distribution MOTIVES FOR BERNANKE’S ERRATIC PATH  What may have convinced Bernanke to announce tapering atJune FOMC meeting  What may have convinced Bernanke to back-pedaling on tapering after a few weeks  What may have convinced Bernanke to back-pedaling again on tapering at Sept FOMC meeting Nikkei 20% drop in May / June ImpliedVols on US Rates doubled up by end June and again by early Sept BERNANKE
  12. 12. TOPPY MARKETS ARE GAPPING MARKETS 12 Strictly Confidential | Not for Distribution  Liquidity-driven markets are VULNARABLE to SUDDENT DIGITAL ADJUSTMENTS and EXTERNAL SHOCKS. We then went further to define TOPPY MARKETS AS GAPPING MARKETS  Over the last 4 months, we had extensive empirical evidence:  1.) GOLD debacle in May  2.) JAPAN: the Nikkei lost 7.3% in one day in mid-May. The largest drawdown since the 2011 Tsunami and 1998 Asian crisis  3.) INTEREST RATES DOUBLED IN JAPAN / SHOT UP IN THE US: rates resurrected to 1% territory in Japan, while rates volatility reached 2008 credit bubble’s levels. It is remindful of the market in 2003 in Japan, where a volatility induced sell-off drove rates from 0.5% to 1.6% between June and September  4.) RATES IN THE US: in mid-June they skyrocketed, while fixed income implied vols doubled up in few days
  13. 13. 13 Strictly Confidential | Not for Distribution RISK PARITY: ADDING VAR SHOCK ON RATES  Risk parity is an asset allocation framework that seeks to ALLOCATE SAME MARKET RISK TO EACH ASSET and then LEVERSTHE PORTFOLIO in order to reach a target portfolio volatility  This means that in dollar terms, the portfolio is very OW low volatility assets, i.e. fixed income, and that those positions are leveraged. The collapse in rate volatility relative to equity volatility since the start of QE means that the leverage in fixed income positions has increased markedly over the past few years  As the MOVE Index now moves markedly HIGHER, we may see OVER-SHOOTING in market sell-off on rising rates. Volatility-induced sell-offs.
  14. 14. MARKETS REMAIN STRUCTURALLY FRAGILE  We continue to believe that MARKETS ARE STRUCTURALLY FRAGILE to VAR-SHOCKS and to sudden, DIGITAL ADJUSTMENTS  In our view, a number of EXOGENOUS FACTOR could force a DOWNSIDE CORRECTION on markets. Specifically: I. OVER-LEVERAGE IN THE SYSTEM – NYSE outstanding margin debt at almost $400bn II. LOW LIQUIDITY / LOW INVENTORIES – which have become a recurring element of current markets III. MARKETS’ BLIND OPTIMISM – most investors have been bought into the Central Banks’ dogma, with substantial part of the markets’ gains explained by P/E multiples rather than earnings expansion  The CAPITAL MISALLOCATION generated by QE-type polices, in order to alienate Tail Risks and kick start growth, is BITING BACK at any given opportunity. Eg: Syria  We DO NOT BELIEVE that a 10% + CORRECTION from the current levels is totally UNJUSTIFIABLE! 14 Strictly Confidential | Not for Distribution
  15. 15. OVER-LEVERAGE IN THE SYSTEM 15Strictly Confidential | Not for Distribution H E D G I N G B O O K : B U B B L E M A R K E T i n E Q U I T I E S - S & P M O S T E X P E N S I V E !  MARKETS are sort of TOPPY, EXPENSIVE vis-à-vis the fundamentals and potentially at RISK of a STEEP CORRECTION. This is particularly true when analysing the S&P
  16. 16. OVER-LEVERAGE IN THE SYSTEM 16Strictly Confidential | Not for Distribution H E D G I N G B O O K : B U B B L E M A R K E T i n E Q U I T I E S - S & P M O S T E X P O S E D Source: Orcam
  17. 17. OVER-LEVERAGE IN THE SYSTEM 17Strictly Confidential | Not for Distribution H E D G I N G B O O K : B U B B L E M A R K E T i n E Q U I T I E S - S & P M O S T E X P E N S I V E !
  18. 18. 18 Should the bull market reverse, fixed income will be much less liquid than investors expect LOW LIQUIDITY / LOW INVENTORIES B O N D M A R K E T S D R I V E N B Y Q E O N LY
  19. 19. BINARY EVENTS & VOLATILITY AHEAD 19
  20. 20. BINARY EVENTS & VOLATILITY AHEAD  As we remain focused on TAIL RISKS, against which we design the portfolio to be over-hedged, here we enumerate the most obvious catalysts ahead of us, warranting the NEED FOR PROTECTION STRATEGIES: I. TAPERING: the market will keep trying to come to grips with the reality that the Fed might sooner or later begin tapering their bond purchase. While tapering has so far been postponed, igniting what we expect to be a short lived nominal rally in Q4, it still will have to materialise at some point with undoubtedly important consequences in the medium term for Interest Rates and Asset’s Pricing II. FED CHAIRMANSHIP: Summers’ withdrawal from the Fed Chair’s race has removed a contentious event from the calendar for Q4. IsYellen a done deal? III. US FEDERAL DEBT CEILING: Come October, confrontations on the fiscal front may heat up again. While our base case scenario contemplates an extension of the debt limits for another year, this also largely represents the consensus view. Therefore we should expect volatility and headline risks should this base case scenario not materialize. As Syria and Summers are now fading away from the media’s headlines, a showdown may now be more likely IV. CHINA’s CREDIT CRUNCH: the key issue for China is the Corporate Sector, whose leverage is 125% of GDP. Growth numbers below 7% might potentially lit the fuse ofCorporate China’s excessive credit V. EUROPEAN ELECTIONS: markets seem to be in standby for September 22nd elections in Germany. While the consensus is that post-elections, Germany will be more accommodative on policies in Southern Europe, we disagree with that. In addition, the political landscape in Italy is crystal-fragile and the chances for new elections are substantial VI. RISING INTEREST RATES: rates represent the biggest threat in the near term, as higher long-dated rates could be the casualty of few concurring forces: a) tapering; b) wild sale of Treasuries from EMs; c) rising GDP expectations that could justify a 4% on 10yrs Govies (our threshold for a disorderly adjustment to asset pricing) 20 Strictly Confidential | Not for Distribution
  21. 21. BINARY EVENTS & VOLATILITY AHEAD  Rising GDP expectations could justify a 4% on 10yrs Govies 21 Strictly Confidential | Not for Distribution R I S I N G I N T E R E S T R A T E S
  22. 22. BINARY EVENTS & VOLATILITY AHEAD 22 Strictly Confidential | Not for Distribution Source: Street Talk Live blog R I S I N G I N T E R E S T R A T E S N O T U N P R E C E D E N T E D D U R I N G Q E P R O G R A M S
  23. 23. BINARY EVENTS & VOLATILITY AHEAD  It is not just in the U.S. that rates are increasing. European bond spreads are surging as well. 23 Strictly Confidential | Not for Distribution Source: Street Talk Live blog R I S I N G I N T E R E S T R A T E S N O T U N P R E C E D E N T E D D U R I N G Q E P R O G R A M S
  24. 24.  CENTRAL BANKS’ EXPANSIONARY POLICIES: in several occasions in the past, the FED and other monetary authorities have attempted to cure financial pandemics with heavily expansionary policies… trading an asset bubble for another. Last, but not least, the bubble in EMs it has been the unintended result of CB’s activities, as EMs saw net inflows doubling up to $8tr in the last 5yrs on ZIRP and QEs policies  PERCEPTION & CONFIDENCE: the effectiveness of quantitative policies has always been about perception and confidence. Any real mechanical linkage to sustainable equity valuations and stronger real economy has YET TO BE PROVEN. Perception and confidence can easily evaporate…  DEBT: one of the major causes to the current market fragility is the ACCUMULATION OF DEBT alongside with the INABILITY to GENERATE the INCOME SOURCES needed to service such debt  On the basis of what is above, we RATHER BE SAFE THAN SORRY and HEDGE our portfolio against severe DOWNSIDE RISKS which have historically followed similar market conditions  We however recognize that it is extremely challenging to call the day in which such correction may take place. POLICY MAKERS CAN INDEED BUY MORE TIME. Therefore, we rely on a SUSTAINABLE, MULTI-DIMENSIONAL RISK MANAGEMENT POLICY  The market remains STRUCTURALLY FRAGILE and can be taken down by any one exogenous or endogenous factor. The most dangerous catalysts are the ones we cannot currently see. Last time around, it was losses of few hundred billions in US Subprime mortgages to push bubble markets into a deep re-pricing of 5 trillions lost GDP and 30 trillions lost market capitalisations globally 24 Strictly Confidential | Not for Distribution THE STRUCTURAL CASE FOR STAYING BEARISH & HEDGING TAIL RISKS
  25. 25. WHY TO STAY BEARISH & HEDGE TAIL RISKS!  Over the past 5 years the US has generated $1 of GDP for every $18 of DEBT, leading to a G7 debt / GDP of a 440%, the function of $140 trillion in consolidated "developed world" debt  G7 countries added $18tn of consolidated debt to a record $140 trillion, relative to only $1tn of nominal GDP activity and nearly $5tn of G7 central bank balance sheet expansion (FED + BoJ + BoE + ECB) 25 Strictly Confidential | Not for Distribution Source: Deutsche Bank, Haver, ZeroHedge
  26. 26. 26 M O N E T A R Y B A S E E X P A N S I O N V S . M O N E Y M U L T I P L I E R A N D V E L O C I T Y O F M O N E Y C O L L A P S E INFLATION SUBDUED UNTIL IT IS NOT  BmV = PY, (where B = the monetary base, m = the money multiplier, V = velocity of money), PY is nominal GDP  The money multiplier is a measure of the maximum amount of commercial bank money (money in the economy) that can be created by a given unit of central bank money, i.e., the total amount of loans that commercial banks extend/create  The velocity of money is a measurement of the amount of economic activity associated with a given money supply, i.e., total Gross Domestic Product (GDP) divided by the Money Supply  This measurement also shows a marked slowdown in the amount of activity in the U.S. economy for the given amount of M2 money supply, i.e., increasingly more money is chasing the same level of output
  27. 27. EMs / COMMODITIES VS. G4 COUNTRIES  As explained already when describing the relationship between the Bubble Chain and the Deleveraging Chain (see below), it is NOT possible to believe that EMs / Commodities could continue to FREE FALL, while G4 countries keep RISING “ad infinitum” on QE and cross border re-allocation of capital flows  Over the last month, the EMs and Commodities have been a drag on Global Markets. Those are early signs of RECOUPLING between the two chains 27 Strictly Confidential | Not for Distribution CATALYSTS
  28. 28. CIO’ s CORNER Trades’Highlights 28
  29. 29. TRADES’ HIGHLIGHTS 29Strictly Confidential | Not for Distribution H E D G E V S S & P D O W N S I D E R I S K  As outlined in our recent Investment Outlooks, we believe that MARKETS are sort of TOPPY, EXPENSIVE vis-à-vis the fundamentals and potentially at RISK of a STEEP CORRECTION.This is particularly true when analysing the S&P  To HEDGE the portfolio vs. DOWNSIDE RISK in the S&P, while ensuring not to burn excessive cash on expensive optionality, we have executed the following strategy:  BUY SPX put, strike 1650, expiry 21st Sept and 16th of Oct, for 110% of the overall portfolio  SELLVIX put, strike 14%, expiry 21st Sept and 16th of Oct, on 14% of the overall portfolio  While an S&P’s correction might be postponed, we argue that SEVERAL RISK FACTORS might keep VOLATILITY LEVELS ELEVATED… therefore helping us to EXPENSE our HEDGES CHEAPLY and potentially even at zero cost
  30. 30. TRADES’ HIGHLIGHTS 30Strictly Confidential | Not for Distribution H E D G I N G B O O K : B U B B L E M A R K E T i n E Q U I T I E S - S & P M O S T E X P E N S I V E  SPX
  31. 31. TRADES’ HIGHLIGHTS 31Strictly Confidential | Not for Distribution H E D G I N G B O O K : B U B B L E M A R K E T i n E Q U I T I E S - S & P M O S T E X P E N S I V E  VIX
  32. 32. TRADES’ HIGHLIGHTS 32Strictly Confidential | Not for Distribution H E D G I N G B O O K : E U R B R E A K - U P a n d R E N E W E D C R E D I T C R U N C H R I S K S  KeyTrade details: Itraxx curve flattener 3yr vs 5yr | Duration weighted (5yrs vs 3yrs maturities)
  33. 33. TRADES’ HIGHLIGHTS 33Strictly Confidential | Not for Distribution T A C T I C A L B O O K : E U R O S T O X X L O N G  As written in our Sept. 3rd Outlook, in anticipation of a mild Tapering, we believe in a SHORT-LIVED RALLY, across both, equity and bond markets  In our view, a short lived rally might also be supported by a breakout / acceleration of key resistance levels  We have played this theme via tactical EUROSTOXX long position. In fact, the European equity market is one of the cheapest to play a short-lived REFLATIONARY story  In executing the trade above we have opted to use optionality, on safe levels. Downside below 2500 by October expiry
  34. 34. TRADES’ HIGHLIGHTS 34Strictly Confidential | Not for Distribution T A C T I C A L B O O K : E U R O S T O X X L O N G Upside gaps: 2942.43 Downside gaps: 2867.11 / 2798.31 / 2721.37 / 2596.01 / 2570.76 / 2511.83 / 2427.32 / 2127.95 Sep Fut; R: 2867/2888/2902/2922/2943 S: 2867/2851/2825/2805/2787
  35. 35. TRADES’ HIGHLIGHTS 35Strictly Confidential | Not for Distribution T A C T I C A L B O O K : L / S P O T A S H P L A Y  On the 30th of July, OAO Uralkali, one of the largest potash producers decided to BREAK AWAY from joint venture marketing CARTEL Belarusian Potash Company (“BPC”)  Uralkali’s split from BPC is expected to DRIVE DOWN global POTASH PRICES as the company shifts to a higher-volume production model, with prices expected to settle at around $350/tonne  While this decision might prove ECONOMICALLY RATIONAL for Uralkali, as its low- cost position means they can cut prices, maximise production, and maintain gross profit, it is considered BAD NEWS for higher-cost producers such as K+S
  36. 36. TRADES’ HIGHLIGHTS 36Strictly Confidential | Not for Distribution T A C T I C A L B O O K : L / S P O T A S H P L A Y
  37. 37. TRADES’ HIGHLIGHTS 37Strictly Confidential | Not for Distribution T A C T I C A L B O O K : L O N G E M s / C o m m o d i t y d r i v e n s i n g l e s t o c k s  Momentum driven strategies Source: JPMorgan
  38. 38. TRADES’ HIGHLIGHTS 38Strictly Confidential | Not for Distribution I N T E R E S T R A T E S V S . E Q U I T Y  Positive Correlation, in spite of real causality Option using 10cms Strike(s) Barrier Expiry Offer Vanilla Discount Correlation Put spread contingent on rates up 95%/85% ps atmf+100 12M 0.38% 2.70% 86% 20% Option using 10cms Strike(s) Barrier Expiry Offer Vanilla Discount Correlation Put spread contingent on rates up 90%/80% ps atmf+100 12M 0.27% 1.95% 86% 20% SPX ref: 1660 12m10y: 2.52% 1y10y ATMF payer contingent on SPX <= 95% at maturity 0.87% offer 3.22% vanilla 25% correlation 37% digital 1y5y ATMF payer contingent on SPX <= 95% at maturity 0.51% offer 1.52% vanilla 10% correlation 37% digital Refs SPX 1648 1y10y 2.62% 1y5y 1.67%
  39. 39. 39 Strictly Confidential | Not for Distribution TRADES’ HIGHLIGHTS Option using 10cms Strike(s) Barrier Expiry Offer Vanilla Discount Correlation S&P PUT contingent on Rates Up 95% Atmf+50 9M 0.88% 4.00% 78% 23% PUT contingent on Rates Up 90% Atmf+50 9M 0.58% 2.70% 79% 23% PUT contingent on Rates Up 95% Atmf+100 12M 0.55% 5.25% 90% 23% PUT contingent on Rates Up 90% Atmf+100 12M 0.39% 3.70% 89% 23% Spx: 1595 9m10y: 2.08% 12m10y: 2.16%
  40. 40. RESEARCH & MEDIA LIBRARY 40
  41. 41. 41 Strictly Confidential | Not for Distribution F A S A N A R A R E S E A R C H Since September 2011, we have published Investment Outlooks and portfolio’s updates. Please find below links to our Research:  September 3rd 2013: Investment Outlook  June 28th 2013: Investment Outlook  May 31st 2013: Investment Outlook  May 3rd 2013: Investment Outlook  April 5th 2013: Investment Outlook  Portfolio Buckets as of 1st March 2013: Value Book vs Hedging Book  March 1st 2013: Investment Outlook  February 1st 2013: Investment Outlook  January 11th 2013: Investment Outlook  December 17th 2012: Investment Outlook  November 16th 2012: Investment Outlook  October 26th 2012: Investment Outlook  October 5th 2012: Investment Outlook  September 14th 2012: LINK Bi-Weekly Note  July 27th 2012: Bi-Weekly Note  July 13th 2012: Bi-Weekly Note  May 2012: Investment Outlook  April 13th 2012: Investment Outlook  March 2nd 2012: Weekly Note  February 17th 2012: Weekly Note  January 7th 2012: Weekly Note  More 2012 reports available upon request F O L L O W F A S A N A R A O N T W I T T E R Follow Francesco Filia, CIO @ Fasanara Capital on Twitter:  https://twitter.com/francescofilia F O L L O W F A S A N A R A O N Y O U T U B E Follow Fasanara Capital on YouTube:  https://www.youtube.com/user/FasanaraCapital RESEARCH & MEDIA LIBRARY
  42. 42. 42 Strictly Confidential | Not for Distribution P R E S S  Fasanara Opportunities Fund Profiled: Article  The Big Picture: Francesco Filia: Japan is a catalyst for other economies: Article on 'Opalesque'  Rates, risks and the regulators - bad week for everyone except Norway? Article on 'the Bench' V I D E O S  5th Sept. 2013: Expecting a Market Correction Video  12th April 2013: Is a Euro Zone Break-Up on the Way Video . Keep Gold Long Term, hedge for monetary madness Video  18th February 2013: Go Long Nikkei and Short Yen. Nikkei to 20,000 Video  28th November 2012: European Equities Will Jump Video  28th November 2012: Real Estate Outlook CNBC Interview 2  31st August 2012: How to hedge fatal scenarios Video  CNBC CLASS ITALIA Video | Video RESEARCH & MEDIA LIBRARY
  43. 43. ABOUT FASANARA CAPITAL 43
  44. 44.  Fasanara Capital Ltd.: Fasanara is an employee owned alternative asset management company headquartered in London and authorized and regulated by the Financial Conduct Authority (“FCA”). Fasanara is also authorised by the Central Bank of Ireland (“CBI”) to act as Investment Manager to Irish authorised collective investment schemes  Strategy: Fasanara pursues an event-driven, multi-strategy portfolio approach investing across the capital structure with core strengths on credit, equity, liquid special situation securities and portfolio FatTail Risk Hedging strategies  Objective: Fasanara seeks to achieve superior, risk-adjusted returns significantly in excess of the debt and equity market indices with modest volatility  Accomplished Investment Team: the team are the core members from the Merrill Lynch Principal Investors group in EMEA, formerly ran by Francesco Filia (MD & EMEA Head), and have spent a combined 24 years in the industry  Competitive Advantage: dynamic and significantly profitable team of managers bound by a set of investment disciplines built over the years  Commingled Vehicle - Summary of Terms & Structure: Date of Launch | 1st ofJuly 2013 Portfolio Manager | Francesco Filia Target size | $ 650MM in equity Target return | MidTeens Fund Structure | Cayman Incorporated Fund Early Investors’ Fee Structure | Base Management Fee 1.25% (inclusive of Platform Fees) + Incentive Fee 20% 44 Strictly Confidential | Not for Distribution FASANARA CAPITAL
  45. 45. 45  Fasanara targets mid-teens annual returns by investing in alpha generating ideas that are uncorrelated to investment cycles  We are event-driven investors with a highly strategic focus on Fat Tail Risk Hedging strategies. We invest opportunistically across a number of asset classes including debt, loans, high yield, distressed securities, securitized assets, public equity and other special situation securities. While fundamental bottom-up analysis represents a key component of our strategy, top-down macro views greatly influence the implementation of our bottom-up investment ideas and strategic FatTail Risk Hedging strategies  We deploy capital opportunistically in response to pre-identified investment themes. This may result in dramatic shifts in our portfolio allocations due to changes in the investment landscape  Our focus on event-driven scenarios and Fat Tail Hedging is expected to allow us to participate at the appropriate time, and in the appropriate security type, for each individual investment by maximizing potential returns while minimizing principal risk and protecting the portfolio against systemic events  Superior Risk Management: the team has developed a tailored-made risk management framework adapted to the event- driven investment strategy. We have implemented strict rule-based limits that cover gross leverage, position liquidity, country, sector, single name ownership, currency, short and maximum ownership exposures Strictly Confidential | Not for Distribution INVESTMENT PHILOSOPHY
  46. 46. 46 CONTACT INFORMATION For further information please contact:  INVESTOR RELATIONS  Investor.relations@fasanara.com  Tel: +44 203 430 2480  FASANARA CAPITAL Ltd.  55 Grosvenor Street, 2nd Floor  London W1K 3HY  United Kingdom Strictly Confidential | Not for Distribution
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