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Liability Driven Investing

Liability Driven Investing

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  • 1. Liability Driven Investing (“LDI”) Effective Risk and Asset Modeling Requirements Various Approaches to Managing to Liabilities Dodd-Frank LDI Financial Technology and Infrastructure Needs31 October 2011 For more information please contact: Ron D’Vari, CEO/Co-Founder (212) 209-0855 rdvari@newoakcapital.com Or visit us on the web at: www.newoakcapital.com/solutions
  • 2. TABLE OF CONTENTS 1 I | Various Approaches to Managing to Liability Benchmarks I I | Liability Driven Investing and Alpha Strategies I I I | Relatively New Alpha Strategies I V | An Example of a Scalable Strategy: Quantitative Global Equity V | Dodd-Frank and Its Impact on LDI V I | LDI - Solutions and Infrastructure Needs Appendix I| OpenRisk M Appendix II| Investment Support ServicesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 3. CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI 2 Comprehensive approach can meet complex institutional, product lines, and regulatory requirements  Asset Liability Management Approach  Various Styles  Basic cash-flow matched, key rate duration matched to full liability-driven investment with sophisticated asset allocation for active management of surplus  Surplus Optimization  Using alternative, real and uncorrelated assets and styles  Unique long dated assets: Life settlements, Structured settlements  Real Assets: Real estate, Commodities  Dollar Neutral Strategies: Long/Short global equities, Long/Short ETF  Unique liquidity management: Short High Yield (“SHYLD”) Strategies (REO Finance, Supply Chain Finance, Asset Based Finance)  Customized Solutions  Customized style and benchmark construction consistent to funding status and institutional profile  Separate accounts or commingled funds  Broad array of fixed income, equity, and alternative asset types and strategies including esoterics  Liquid Fixed Income: All liquid fixed income (Short Duration, Core, Core+, Long Duration)  Illiquid Fixed Income: Loans , structured products, specialty finance  Equities: Long/Short, Event Driven, International Quant Equities, ETFs, High Frequency, Private Equities  Real Investing: Real Estate, Land, Commodities  Multi-Strat Macro: Free-to-roam  Ongoing Risk Management and Reporting  Ongoing in-depth risk assessment, valuation, performance monitoring  Daily benchmark variance analysis and marked-to-market  Full cash flow scenario analysis  Periodic benchmark performance attributionPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 4. 3 I. Various Approaches to Managing to Liability BenchmarksPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 5. 4 CHALLENGES OF MANAGING TO LIABILITY BENCHMARKS Role of the benchmark What risk to manage? An Illustrative Case Study Traditional liability benchmarks and choice of discounting Static spread Dynamic spread How do you measure the manager’s performance in A/L framework? Impact of spread volatility on performance measurement Distortion due to static spread assumption Manager behavior and its impact on expected returns Case for dynamic-spread liability benchmark Role of Min-VAR Optimization in Asset/Liability Management Key-rate-duration matched dynamic spread benchmarks Key-rate-duration matched market-based benchmarksPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 4
  • 6. 5 WHAT RISK(S) TO MANAGE TO? Definitions The following risks measure variability of: Absolute Return Risk = Std. Dev. (Portfolio Return) Relative Risk = Std. Dev. (Portfolio Return - Benchmark Return) Relative-to-Liability Risk = Std. Dev. (Portfolio Return - Liability Return) Basis Risk = Std. Dev. (Benchmark Return - Liability Return) How Should Risk Be Measured? Portfolio vs. Cash (Total Return Risk), Portfolio vs. Benchmark (Relative Risk), or Portfolio vs. Liability (Relative-to-Liability Risk)?PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 5
  • 7. 6 WHAT IS RELEVANT? Choice of benchmark can be a critical determinant of returns Market-based benchmarks - Basis Risk Liability-based benchmarks - Absolute Risk What seems to be most relevant? The answer is “it depends!” or “it is regime dependent” Short-Run  Total/Absolute (sponsor) or Relative Risk (manager) Long-Run Relative-to-Liability Risk (sponsor) Is there a pattern? In down-markets there is reversion to liability-based approach Absolute returns look ugly Relative returns look horrific because liabilities outpace markets In up-markets market-based benchmarks rulePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 6
  • 8. 7 RECENT EXPERIENCE Up-market Period: 1984-2000, 2003-2007, 2009-2010 Market-based strategies outperformed liability benchmarks Basis risk was profitable and led to huge pension surpluses Sponsors tended to down play relative risk to liability benchmarks Contributions to pension plans were kept at minimum Down-Market Period: 2000- 2003, 2007-2009, 2011 Liabilities have significantly outperformed portfolios and market-based benchmarks Basis risk has materialized and has led to huge pension deficits Sponsors are re-evaluating relative risk to liability benchmarks Contributions to pension plans are resuming and a must  Sponsors are reneging on their liabilitities Extension of retirement age Reducing post retirement health benefits Cutting off defined benefit (e.g. California)PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 7
  • 9. OPTIMAL ALLOCATION OF ASSETS - DIFFERENT APPROACHES 8 Modern portfolio management ignores risks vs. liabilities Optimal Utility Function Approach Optimization is generally cast in absolute risk-return space Inter-temporal risk is measured in absolute terms rather than relative to the liabilities Based on some form of efficient frontier Market-based benchmarks Choice of benchmark is driven by risk-tolerance (utility) Liabilities ignored for the most part Liability Immunization Approach Optimization is cast in relative-to-liability risk-return space Inter-temporal risk is measured relative to the liabilities Estimation of liabilities are key Discounted-liabilities form the benchmark  Discounting methodology varies Choice of discounting methodology can influence results significantlyPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 8
  • 10. OPTIMAL UTILITY FUNCTION APPROACH 9 Establish Efficient Frontier and Utility Function Select investable asset classes and corresponding indicative market indices Establish length of time and frequency of measurement most relevant Identify risk tolerance or a risk-return utility function  Establish Optimal Benchmark/Asset Mix Optimize Sharpe Ratio by solving for optimal asset class on efficient frontier and risk tolerance Actively Manage Optimize information ratio, i.e. alpha/tracking error Risks vs Liabilities Are Ignored Benchmark - Optimal Sharpe Ratio Management - Optimal Information RatioPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 9
  • 11. 10 TRADITIONAL LIABILITY IMMUNIZATION APPROACH Establish Liability Benchmark Liability Cash Flows: Establish realistic liability (RL) or participating liability (PL) cash flow stream Discounting Methodology: Establish a discounting methodology Curve - Zero coupon curve + some spread Treasury, agency, or swap Tail Rate - A discount rate for flows past 30 years Spread - Sufficient spread that meets the liabilities in the long run and provide with additional risk- adjusted return Manage Assets vs. Benchmark Add alpha over liability benchmark through Actively manage key-rate duration around liability benchmark Actively manage spread exposure Discounting methodology affects funding status Static spread discounting of liabilities could distort funding status significantlyPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 10
  • 12. 11 TRACKING ERROR ATTRIBUTION IN ASSET LIABILITY Asset and Liability Performance Asset = Duration/Curve Move+ Spread Moves + Credit Blow Ups Liability = Cash Flow Changes + Duration/Curve Move Asset/Liability Return Differences Actuarial gain or loss Mismatch in duration/curve exposure Spread volatility Credit blow ups Management performance may be hard to isolatePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 11
  • 13. AN EXAMPLE OF A STUDY RUN IN APRIL 2001 12 Various Allocations Considered Immunized Portfolio Liabilities Date: April 01 Aggressive Moderate* Conservative Moderate Spread to Treasury (bp) 150 125 100 125 Average Quality A-/BBB+ A- A A- Minimum Quality BB BB BBB- BB Effective Duration 11.4 11.6 11.8 11.6 Portfolio Expected Return (IRR) 7.3% 7.1% 6.8% 7.1% Relative Expected Return 0.2% 0.0% -0.2% 0.0% Relative Volatility 2.3% 0.0% 1.2% 0.0% Absolute Volatility 8.0% 7.6% 7.1% 7.6% Efficient Frontier Portfolio Cash 0.0% Equity 50% Fixed - Core 40% High Yield 10% Portfoli Expected Return 10.18% Relative Expected Return 3.08% Relative Volatility 14.17% Portfolio Standard Deviation 9.34%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 12
  • 14. BASIC RISK/RETURN DATA 13 Cash Expected Return 4.50% Equity Expected Return 9.0% Standard Deviation 17.5% Correlation to Core 0.3 Correlation to High Yield 0.4 Correlation to Long Bond 0.15 Relative Std Dev to Liability 17.97% Economic Downturn Stress Senario -29.2% Fixed Income 10 year T reasury Yield 5.30% 30 year T reasury Yield 5.85% Long Duration Liability 10s Yield Beta to 30s Yield 1.20 Core High Yield Aggressive Moderate Conservative (Moderate) Spread over T reasury (bp) 0.75% 3% 1.50% 1.25% 1% 1.25% Expected Return 6.05% 7.80% 7.35% 7.10% 6.85% 7.10% Duration 4.5 4 11.44 11.63 11.82 11.63 T reasury Yield Standard Deviation 0.50% Spread Standard Deviation 0.25% 0.45% 0.40% 0.25% 0.20% 0.25% Spread Correlation to T reasury 0.40 0.50 0.2 0.4 0.4 0.4 Return Standard Deviation 2.89% 3.29% 8.01% 7.47% 7.19% 7.47% Sharpe Ratio 0.54 1.00 0.36 0.35 0.33 0.35 Expected Relative Return to Liabilities -1.05% 0.70% 0.25% 0.00% -0.25% 0.00% Relative Return Standard Deviation 6.64% 6.81% 2.29% 0.00% 1.18% 0.00% Information Ratio -0.16 0.10 0.11 n.a -0.21 n.a Economic Downturn Stress Senario Equity Return -29% Fixed - Yield Changes 10 yr Treas Yield Change -1.00% Long Duration Liability 30Yr Treas Yield Change -0.75% Core High Yield Aggressive Moderate Conservative Moderate Spread Change 0.25% 0% 0.35% 0.25% 0% 0.25% Fixed - Returns 9.43% 10.20% 11.92% 12.91% 13.35% 12.91%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 13
  • 15. 14 COMPARISON OF DIFFERENT STRATEGIES Initially 15% Overfunded Example Immunized Aggressive Immunized & Aggressive Immunized & Aggressive Immunized + Market Based Tail+Surplus in Equity Surplus in Equity Surplus in Equity Approach (Future O verlay) (Future O verlay) (No Future O verlay) Portfolio Weights - % Liabilities Cash 0.0% -25.0% -15.0% 0.0% Equity 58% 25.0% 15.0% 15.0% Fixed - Core 46% 0.0% 0.0% 0.0% High Yield 12% 0.0% 0.0% 0.0% Long Duration 0.0% 0.0% 0.0% 0.0% Aggressive 0.0% 115.0% 115.0% 100.0% Moderate 0.0% 0.0% 0.0% 0.0% Conservative 0.0% 0.0% 0.0% 0.0% Total - % Liabilities 115.0% 115.0% 115.0% 115.0% Long Term Expectations Liability Expected Return 7.10% 7.10% 7.10% 7.10% Portfoli Expected Return - % Liabilities 10.18% 9.58% 9.13% 8.70% Relative Expected Return - % Liabilities 3.08% 2.48% 2.03% 1.60% Relative Volatility 14.17% 8.31% 8.29% 8.28% Relative Information Ratio 0.22 0.30 0.24 0.19 Sharpe Ratio 0.47 0.41 0.40 0.40 Economic Downturn Scenario Portfolio 1-Yr Return - % Liabilities -11.30% 5.28% 8.65% 7.54% Liability 1-Yr Return - % Liabilities 12.91% 12.91% 12.91% 12.91% Relative 1-Yr Return - % Liabilities -24.21% -7.63% -4.26% -5.37% Ending Surplus (Deficit) - % Liabilities -9.21% 7.37% 10.74% 9.63%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 14
  • 16. RESULTS SUMMARY 15 Optimal Sharpe ratio allocation, when viewed from relative stand point, is Highly risky in economic downturn scenario Not highest information ratio Variations of immunized strategy can lead to Superior relative risk profile Modest give up in expected return Much lower exposure to economic downturn scenarioPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 15
  • 17. DISTORTION DUE TO STATIC-SPREAD DISCOUNTING IN VOLATILE SPREAD MARKETS 16 Introduces Funding status mismeasurement Measurement tracking error Makes it harder to distinguish impact of Credit calls/mistakes Curve bets/mismanagement Leads to sub-optimal spread allocation Tracking error risk leads to risk avoidance Managers may under invest in spread products and miss opportunities to earn higher yields Static spread discount rates distorts funding status and leads to sub-optimal sector allocationPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 16
  • 18. 0 100 200 300 400 500 600 700 800 Agency 1-3 24 Agency 3-7 44 Jan-03 Agency 7-10 54 Agency 10+ PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 51 Max Agency TOT 39 Credit Cards 72 75% Disc MBS (P<=100) 0 Prem. MBS (P>=100) 86 Mean 15-Year MBS Source: Salomon Yield Book and State Street Research 90 Monthly Spread History - Jan 1989 to Jan 2003 Agency MBS 86 25% AAA/AA Corporates 1-3 60 AAA/AA Corporates 3-7 Min 100 AAA/AA Corporates 7-10 167 AAA/AA Corporates 10+ AAA/AA Corporates TOT 113 105 A Corporates 1-3 119 A Corporates 3-7 A Corporates 7-10 142 145 A Corporates 10+ 154 A Corporates TOT 141 BBB Corporates 1-3 30217 BBB Corporates 3-7 318 BBB Corporates 7-10 280 BBB Corporates 10+ 267 BBB Corporates TOT 291 BB Corp. 707 CASE FOR DYNAMIC-SPREAD LIABILITY BENCHMARKS -HISTORICAL SPREAD VOLATILITIES 17
  • 19. 18 TRADITIONAL ALTERNATIVES TO STATIC SPREAD DISCOUNTING Two Alternatives Market-based Spread Examples include: Single-A long corporates Swap spread High-grade corporate option-adjusted spread Portfolio Spread Some use duration-weighted option adjusted spread of the portfolio Both Alternatives May Not Be Optimal Market and portfolio asset mix may not be necessarily optimal from absolute volatility standpoint Traditional alternatives to static spread discounting are not necessarily optimalPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 18
  • 20. 19 OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY Benefits Minimizes tracking error and other forms of risk such as VAR vs. static-spread liability benchmark Based on an optimal allocation among spread sectors across all maturities Downside risk constraints can be used to control allocation of risk It is equivalent to highest Sharpe ratio portfolio in absolute space Optimal Dynamic-Spread methodology leads to benchmarks with minimum variance w.r.t. static-spread liabilitiesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 19
  • 21. 20 OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY - BASIC STEPS Step 1: Target Return Over Treasury – Establish required long term spread to meet long term liabilities – Add a target strategic added value Step 2: Define Investible Fixed Income Universe – Treasuries, Agencies, ABS, CMBS, AAA-AA Corporates, A Corporates, BBB Corporates, BB Corporates, Mortgage Pass- Throughs Step 3: Collect appropriate historical volatility of option- adjusted spreads (OAS) for all sectors Step 4: Define Allocation ConstraintsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 20
  • 22. OPTIMAL RISK-CONSTRAINED DYNAMIC SPREAD METHODOLOGY - BASIC STEPS 21 Step 5: Perform Risk Constrained Optimization – Objective: Min VAR (or Single Downside Risk) – Constraints: • Duration Weighted OAS = Target Return Over Treasury • Other constraints such as  Duration Spread < x1  Spread Product % < x2  ABS and CMBS % < x3  High Grade Corporates <x4  High Yield % <x5  Etc. Step 6: Mark-to-Market Duration Weighted Spread Periodically • Keep sector weights constant • DWLOAS = Duration-Contribution Weighted Liability OASPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 21
  • 23. ONGOING EVALUATION OF DYNAMIC-SPREAD LIABILITY BENCHMARK 22 Dynamic Spread Liability Return For Each Period – DSLV1 = Cash flows discounted at Treasury+ beginning DWLOAS1 – DSLV2 = Cash flows discounted at Treasury+ ending DWLOAS2 – Return Liability = DSLV2/DSLV1 - 1 – Note: Process has to be unitized to each cash flow disbursement Review Funding Status and Surplus/Deficit Status – Portfolio - DSLV – Required return over treasuries – Appropriateness of VARPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 22
  • 24. HISTORICAL SPREAD SUMMARY 23PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 23
  • 25. OPTIMIZATION FRAMEWORK 24PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 24
  • 26. RISK OPTIMIZATION RESULTS 25PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 25
  • 27. 26 ISSUES NOT CAPTURED BY DYNAMIC-SPREAD LIABILITY BENCHMARK Duration Weighted Liability OAS (DWLOAS) does not reflect downgraded issues leaving the benchmark each month! This can lead to significant over-statement of liability benchmark returns Solution: Key-rate-matched Market Based BenchmarksPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 26
  • 28. KEY-RATE-MATCHED MARKET-BASED BENCHMARKS 27 i n Blended Benchmark Wi * MktSeci i 1 Definitions – Sum of Square of Key Rate Errors = Sum (BB_Kduri minus Liab_KDuri)^2 – BB_KDuri = Blended Benchmark Key-Rate Duration I – Liab_KDuri = Static Spread Liability Key-Rate Duration I Solve for Wi’s – Minimize Sum of Key Rate Errors Squared – Subject to chosen constraints Revisit optimization periodically – Key-rate drift – Funding level – Risk tolerancePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 27
  • 29. KEY-RATE-MATCHED MARKET-BASED BENCHMARKS 28 • Marking-to-Market Liabilities – Discount liability cash flows at Treasury + Duration-Weighted OAS of the Benchmark • Benchmark Return = RB = Σ { Wi * Ret Secti } • Benefits – Better Reflects Market Conditions – Less subject to market spread volatility – Clear Mandate - Managers are more accustomed to managing portfolios against market-based benchmarks – Transparent – More transparency of manager’s active management added value – More Observable – Can be independently measuredPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 28
  • 30. 29 SUMMARY Optimal portfolios in absolute space can lead to significant risk vs. liabilities Static-spread liabilities can introduce significant mismeasurement of funding status and distort active management Dynamic-Spread Liability Benchmarks improve funding distortions but introduces credit migration and performance measurement ambiguities Key-Rate-Matched Market-Based Benchmarks mitigate many issues related to funding status and performance measurement Should lead to clearer definition of risk and more optimal active management in volatile marketsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved. 29
  • 31. 30 II. Liability Driven InvestingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 32. CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI 31 LDI == Disciplined Approach to Investing  Level I: Comprehensive portfolio strategy and capability analysis  Asset-Liability Assessment  Various Fund Due Diligence  management and operational evaluation  risk measures, scenario analysis, drawdown, performance analysis and attribution  Level II: Liability-Driven Investing  Asset and strategy allocation  Portfolio construction & optimization  Level III: Ongoing asset management and evaluation of emerging asset classes  Distinguished by thoughtful and in-depth ongoing risk assessment, valuation, performance monitoring and attribution for broad array of fixed income, equity, and alternative asset types and strategies including esoterics  Customized Strategies:  Fixed Income – Short duration, Core, Core+, Long Duration, Immunization,  Equity – Quant Equity (US, Non-US, Global), Long Only130/30, Long/Short  Alternatives - Structured Products, Asset-based Lending, Specialty Finance, EsotericsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 33. CREATING AN EFFECTIVE RISK MODELING FRAMEWORK FOR LDI 32 LDI Challenges  Asset Management Infrastructure  Tailored and Integrated Front To Back Office Solutions - Full turn-key front-to-back solutions and services  Front Office: Decision support infrastructure, portfolio management workstation, up-to-date portfolio risk analytics & reporting, trade order management and execution, valuation, asset liability management and relative value analysis tools  Middle Office: Trade capture and processing, services, interface with depository and custodial services, collateral management, counterparty management, performance attribution and benchmark comparison  Back Office: Investor reporting, integration with third party administrators, performance attribution  Solution Elements  Quantitative and fundamental valuation, pricing and risk analysis of:  equities, fixed income, real estate, commodities  Hedge fund strategies, fund of funds  Private equities  Structured products  Derivatives  Esoterics  Emerging assets  Valuation of hard -to-value assets including residential, commercial, consumer, equipment, project finance loans and structured products  Cash flow forecasting, sensitivity analysis, stress testing , scenario analysis, relative hedge analysis, economic/rating agency/statutory capital  Daily, weekly, monthly portfolio and security valuation and risk analytics for broad array of fixed income, equity, structured products, derivatives, and alternative asset typesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 34. KEY LDI REQUIREMENT - KNOWLEDGEWARE 33 Market Experience, Technology and Process Core Competencies: Experienced professionals providing independent and transparent solutions Experienced Disciplined Processes Advanced Technology Professionals • Team comprised of traditional and • Transparent • Accessible throughout the entire emerging assets as well as geo-political • Well tested process – allocation, portfolio experts with deep experience in • Understood throughout organization management, risk management trading, portfolio and risk management • Open technology to provide • Scalable • Quantitative and fundamental skills • Focused on both assets and liabilities customized analytics, data • Deep understanding of intrinsic values management an actionable reporting, • Covering both liquid and illiquid assets • Comprehensive - asset and liability • Complex liability structures sides Decision Traditional and Making Emerging Assets Integrated Reporting Infrastructure Evaluation, I Asset nvesting, and Liability Risk Analysis Trading ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 35. KEY LDI REQUIREMENT -KNOWLEDGEWARE 34 Enablers Knowledge- Asset Management, Risk Management, Solutions, Kno Driven Experience wledge-Driven Support Advice and Services Services Seasoned Senior Management with Scalable Integrated Management Deep Operating and Team of Cross Functional Expertise Integrated Technology, Granular Data, Open Analytics Infrastructure Platform, Flexible Reporting Process and Workflow Transparent Disciplined Disciplined Processes Scalable Customizable Solutions EfficientPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 36. 35 III. Relatively New Alpha StrategiesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 37. EXAMPLES OF RELATIVELY NEW ALPHA STRATEGIES 36 Emerging Sectors (New Media , Renewable) Equity - High Frequency, Global Quant Equity Merchant Banking Distressed and/or Illiquid Fixed Income Distressed Real Estate Specialty Finance Esoterics Frontier InvestingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 38. ALPHA STRATEGIES AND STYLES 37  Market-Based Fixed Income  Short-Duration, Core, Core+, Long Duration, High Yield, Emerging Markets, Real Portfolios  Global Quant Equities  Long only, Long/Short, 130/30 US-only, Non-Us, or Global for small, medium, large and all cap  Hedge Funds and Fund of Funds  Myriad of strategies  PRIVATE EQUITY  Renewable  New Media  Cloud-computing  Merchant bankingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 39. ALPHA FIXED-INCOME AND REAL ESTATE STRATEGIES 38 Broad Based Asset Expertise Is Utilized Through Internal and External Resources  Active Trading  High Quality; High Yield; Leveraged Loan; Emerging Markets  Distressed Debt and Real Estate  Structured Products  Residential: REO Bridge Finance, Nonperforming Loans; REO Equity  CRE Recapitalization  Consumer Finance  Specialty Finance  Asset-based Finance  Supply Chain Finance  Insurance Linked: Premium finance, life settlement, longevity swaps  Esoterics: Structured settlement, Intellectual Property, Litigation  Real Estates  Debt, Equity, Distressed  Operating Companies and REITS  Core, Value Add, OpportunisticPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 40. EMERGING STRATEGIES: MANAGING COMPLEX PRODUCTS FROM LOANS TO SECURITIES 39 Credit crisis has created unique opportunities within structured credit universe Spectrum of issues within structured credit leads to highly attractive and scalable skill-based asset management opportunities Structured product expertise, technology and process knowledge is highly specialized and leads to significant operational leverage Residential Real Estate Commercial Exotics Real Estate Structured Credit Expertise and Tools Specialty Consumer Finance Credit Leveraged FinancePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 41. 40 IV. An Example of a Scalable Strategy: Quantitative Global EquityPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 42. 41 GLOBAL QUANTITATIVE EQUITY Example of Equity Investment Philosophy Well-defined investment philosophy and well disciplined process.  We term our Philosophy Fundamental Objective  We believe human behavioral biases drive many existing market inefficiencies  We use both quantitative and qualitative research methods to exploit these inefficiencies  Our Philosophy’s practical and analytical process dominates “emotionally driven” approaches  Our Process manages multi-dimensional risks by using rigorous risk controls Fundamental  Quantitative  Practical PROPRIETARY AND CONFIDENTIAL41 ©2011 NewOak Capital LLC. All rights reserved.
  • 43. 42 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Experience and Approach We have vast expertise in equity valuation techniques across equity asset classes. Our team have outperformed their benchmarks in long only, long short, and market neutral strategies. We have experience in both public and private equity analysis throughout the world and across company size.  Factor Analysis  Valuation  Long/Short Relative Value  Proprietary Nonlinear Transaction Cost Analysis  Portfolio Optimization and Trading  Includes transaction cost management  Risk Management  Scenario Testing  Time Series  Attribution AnalysisPROPRIETARY AND CONFIDENTIAL 42©2011 NewOak Capital LLC. All rights reserved.
  • 44. 43 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Process We base our Investment Process upon three main concepts:  Alpha Driven  High alpha stocks are purchased and held – except when alpha data is suspect  Stocks become sell candidates when alpha drops below the top quintile  Risk Controlled  Stocks chosen to replace stocks sold are chosen to help control risk as well as to raise portfolio average alpha  Market, Size, Style, and Energy risk are kept close to benchmark exposure – Northfield, BARRA, Axioma are useful tools  Region, Sector, and Region/Sector weights are kept to within +/-10% of benchmark weights  Transaction Cost Sensitive  Alpha must exceed estimated transaction costs  Transaction costs are non-linear as trade sizes increase PROPRIETARY AND CONFIDENTIAL43 ©2011 NewOak Capital LLC. All rights reserved.
  • 45. 44 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Experience and Approach We Believe Human Behavioral Biases are the key to Quantitative Modeling. Cause of Inefficiency Factor Group Factor Group Description How attractively is the stock priced Emotional Investor Behavior Relative Value relative to industry peers? Imperfect Reaction to New Momentum/Sentiment Are analysts and investors upgrading Information their view of the stock? Are insiders at the company acting Separation of Ownership and Insider/Management as if the stock is cheap in a Management shareholder-friendly way? Has the stock appreciably Impatient Trading and/or Short-term Short-Term/Technical out/underperformed its industry Overreaction peers recently? News Analytics Does stock price reflect qualitative Incomplete Information Set information?PROPRIETARY AND CONFIDENTIAL 44©2011 NewOak Capital LLC. All rights reserved.
  • 46. 45 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Process We divide the world into 90 categories by Region and Economic Sectors. Region 0 1 2 3 4 5 6 7 8 Australi Middle United Europe UK & Asia Latin Sector FTSE AWI Weight a & New Japan Canada East & States ex UK Ireland Pacific America Zealand Africa 0 Oil & Gas 4.23% 1.27% 1.55% 0.18% 0.78% 0.12% 0.83% 0.71% 0.66% 1 Basic Materials 1.20% 1.38% 1.13% 0.88% 0.99% 0.61% 0.76% 0.48% 0.83% 2 Industrials 4.80% 2.45% 0.42% 0.23% 1.73% 1.64% 0.22% 0.15% 0.21% 3 Consumer Goods 4.25% 3.02% 1.05% 0.08% 1.24% 1.85% 0.05% 0.08% 0.34% 4 Health Care 4.50% 1.71% 0.74% 0.10% 0.09% 0.43% 0.00% 0.21% 0.01% 5 Consumer Services 4.93% 0.98% 0.79% 0.37% 0.53% 0.65% 0.17% 0.22% 0.26% 6 Telecommunications 1.39% 1.24% 0.59% 0.05% 0.70% 0.35% 0.11% 0.26% 0.30% 7 Utilities 1.45% 1.21% 0.35% 0.09% 0.36% 0.41% 0.03% 0.10% 0.22% 8 Financials 6.80% 4.43% 1.83% 1.48% 3.34% 1.37% 1.32% 0.63% 0.92% 9 Technology 6.75% 0.63% 0.10% 0.00% 1.43% 0.56% 0.12% 0.01% 0.00% Portfolio Weights are controlled, relative to these categories, as part of a rigorous risk control process which also controls for market beta, style, and size risks.PROPRIETARY AND CONFIDENTIAL 45©2011 NewOak Capital LLC. All rights reserved.
  • 47. 46 GLOBAL QUANTITATIVE EQUITY Quant Equity Investment Process We believe experience-driven insights into the data are critical to the Process.  Bad Earnings Data: Spreadsheet Manual Entry  Conditions Change: Morning Earnings Surprise  Conditions Persist: Short-Term Price Reversal Window  Complex Industry Schemes: Japanese Financials, European Industrials  Global Correlations: Oil and Financials Good managers confirm the quantitative results, they don’t obey it. PROPRIETARY AND CONFIDENTIAL46 ©2011 NewOak Capital LLC. All rights reserved.
  • 48. 47 GLOBAL QUANTITATIVE EQUITY Quant Equity Team’s Investment Performance Our team has outperformed their benchmarks since 1996  Managed 5-star Morningstar international equity long-only fund  Responsible for $10 billion in long-only mandates  Demonstrated value-add from both long and short positions Time Strategy Benchmark Period Asset Class Benchmark Period Return Return Alpha International BNY 2004 to 9.8% 7.1% 2.7% 130/30* ADR/FTSE 2010 Long Only MSCI EAFE 1996 to 5.9% -0.9% 6.8% International** 2002q1 US Large Cap*** S&P 500 1996 to 9.4% 6.8% 2.6% 2010 US SMid Cap*** Russell 2500 1996 to 17.5% 9.3% 8.2% 2010 * Returns are gross of fees. Note on the Benchmark and Universe: The fund Benchmark changed from the Bank of New York ADR Index to the FTSE All-World ex US Index on 1/1/2007 to reflect the expansion of the portfolio’s composition. Through November 2006, our universe consisted of the 650 most liquid ADRs and US GDRs. On December 1, 2006, our universe expanded to include 4,000 of the most liquid common equity shares on local exchanges in the global markets ex-US. Data referring to excess return over a “Benchmark” refers to the Benchmark that was in effect at the time in question. ** Long Only International performance was produced at ING/Aeltus Investment Management in mutual fund and institutional separate account vehicles including a five star Morningstar rated mutual fund. *** Large Cap and Smid Cap performance was produced at ING/Aeltus Investment Management in mutual fund and institutional separate account vehicles from 1996 until 2004. PROPRIETARY AND CONFIDENTIAL47 ©2011 NewOak Capital LLC. All rights reserved.
  • 49. 48 GLOBAL QUANTITATIVE EQUITY Quant Equity Product Research & Development We have developed a superior International Small Cap Model: Global SC Fund Alpha Predicted Actual 9/30/2003 Tracking Error Tracking Error Inception 2003 14.63% 16.50% 1.88% 3.9% - 4.1% 6.0% 2004 30.42% 43.22% 12.80% 2005 22.51% 50.62% 28.11% Periodicity Hit Rates 2006 32.55% 45.15% 12.60% 2007 13.56% 23.21% 9.65% Monthly 69% 2008 -52.03% -46.02% 6.02% Quarterly 93% 2009 61.24% 69.32% 8.09% Annually 100% Part Year - Nov 2010 14.13% 19.81% 5.67% Annualized Since Inception 13.21% 24.90% 11.69% Time Period September 2003 to November 2010; PROPRIETARY AND CONFIDENTIAL48 ©2011 NewOak Capital LLC. All rights reserved.
  • 50. 49 GLOBAL QUANTITATIVE EQUITY Quant Equity Product Research & Development An additional model for the US market: Annualized Alpha 14.0% 12.5% 12.0% 9.8% 10.0% 8.6% 7.7% 8.0% 6.0% 4.0% 2.0% 0.0% International v FTSE AWI Smid Cap v Russ 2500 Large Cap v S&P 500 Index Large Cap v Russ 1000 ex US Index Index Annualized Alpha Top Decile Versus Benchmark Time Period 2001 to 2010PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 51. 50 V. Dodd-Frank and Its Impact on LDIPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 52. THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 51 The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act") passed in July 2010 and required several regulatory agencies including the SEC, CFTC and FDIC to propose and finalize more than 500 rules in order to give shape and structure to the sweeping reform of the financial regulatory system envisioned by the Act. Several key regulations under Title VII of the Act related to the $600+ trillion derivatives market are being finalized in 2011 General objectives are transparency, reducing systematic risk, ensuring orderly markets OTC derivatives markets Significant objective is to move the OTC derivatives transactions (“Swaps”) activities to the regulated exchanges with clearing through central clearing houses Use of clearinghouses “mutualize “ the counterparty risks among members hence reduce the systematic risks  Implications: The definition of “swap” is very broad All parties will be affected and need to assess the relevant compliance rules, operational risks, business costs, and how it affects them. No one is exempted from record keeping, reporting, and rules of conductPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 53. Fund Managers Under Dodd-Frank 52 Challenges and Requirements Ahead for OTC Derivatives Activities Collateral management requirements including Counterparty risk management Liquidity management Risk-based margining •Marked-to-market and Value-At-Risk •Collateral optimization  Operational •Collateral amount verification •Collateral movements mechanism and costs  Administrative •Record keeping and reporting •Rules of conduct Hedge Fund Transparency Fund-of-fund position aggregation Collateral management validation and optimization Hard-to-value assets and investor reportingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 54. Fund Managers Under Dodd-Frank 53 Methodical Steps to Take Types of Transactions  Currently involved in (“on the book”)  Contemplated transactions  Entity Classification  Highly Regulated – depends on level of activity as well as purpose •SD – Swap Dealer • MSP – Major Swap Participants  Eligible Financial Participants –ECP •Can do bilateral transactions •Must have a level of sophistication and financial means Less Regulated - Commercial End Users (“CEU”) • Must be using it for hedging or mitigate risk •Cannot be a financial entity!  Execution and Clearing Requirements  Not all swap types require centralized execution and clearing but most doPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 55. COLLATERAL MANAGEMENT FOR INSTITUTIONAL ASSET MANAGERS 54 Integral part of risk and liquidity management CREDIT RISK EXPOSURES • SECURITIES LENDING • PORTFOLIO LOANS • OTC DERIVATIVES • IF NOT ALREADY WILL BE 100% SUBJECT TO ISDA, CSA, AND COLLATERAL POSTING COLLATERAL MANAGEMENT MITIGATES COUNTERPARTY CREDIT RISK BUT INTRODUCES OPERATIONAL RISKS CREDIT RISK MANAGEMENT LEADS TO COLLATERAL MANATEMENT  OPERATIONAL ISSUES TIMELY FORECAST OF VARIATION MARGINS • DERIVATIVES AND COMPLEX SECURITIES PRICING SENARIO ANALYSIS  VALUATION AGENT AND DISPUTE MECHANISIM COMPLEX DOCUMENTAION OPTIMIZATION TIMELY EXECUTION REHYPOTHECATION CAN LEAD TO CASCADING EFFECTSPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 56. WHO NEEDS COUNTERPARTY AND COLLATERAL RISK MANAGEMENT CAPABILITIES 55 VAST ARRAY OF FINANCIAL INSTITUTIONS WITH COUNTERPARTY EXPOSURES Banks • Global and Domestic Banking Institutions Insurers , REITS, Specialty • Life and P&C Insurance Companies, Reinsurers, REITS, Specialty Finance Finance Asset Managers/Treasurers • Traditional and Alternative Asset Managers, Treasurers Governmental Agencies • Central Banks, Sovereign Funds, Supra-nationals, Government Agencies Pension & Endowments • Pension Funds, Foundations and EndowmentsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 57. 56 VI. LDI - Solutions and Infrastructure NeedsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 58. LIABILITY DRIVEN INVESTING 57 LDI REQUIRES AN NTEGRATED APPROACH TO RISK, ASSET AND FINANCIAL MANAGEMENT Front Office: Portfolio Workstation, Risk & Trade Management, AL M STRUCTURED: Middle GLOBAL FIXED FIXED INCOME RMBS, CMBS, Office: Trade INCOME DERVIATIVES ABS, CDO, CLO, Regulatory Reporting & Processing, Cleari Compliance ng, Valuation, Col CSO, SIVS lateral Management INTEGRATED APPROACH TO WHOLE LOANS REAL ESTATE ALTERNATIVES ASSET MANAGEMENT SERVICES GLOBAL EQUITIES PRIVATE Counterparty Back Office: and Collateral Reporting, Performance EQUITIES DERIVATIVES EQUITIES Measurement, Attribution Management Liquidity, Credit & Asset Liability ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 59. ASSET MANAGEMENT/RISK MANAGEMENT ENVIRONMENT 58 INFRASTRUCUTURE REQUIREMENTS RAPIDLY RISING WITH THE SIZE OF OPPORTUNITIESThe environment is ideal penetrating and Well-Definedcapturing market share in regimented Strategies: Fixed, Equities, Asset-global fixed income, equity, and alternative Based Lending, Specialtyasset management Finance Front Office:• The mounting importance of asset liability Counterparty and Collateral Management Portfolio, Risk & Trade Management and credit management• The growing demand for global fixed income and diversified equity products • Increase in fixed income-focused financial institutions Asset/Risk • Global quant equity opportunities• Global growth of multi-family offices Regulatory Reporting & Management Middle Office: Trade Processing, Clearing, V Compliance• Ever increasing demand for articulated and aluation, Collateral Management transparent asset management by pension plans, private wealth and financial institutions• The mounting complex regulatory risk Back Office: management and reporting requirements Credit Risk & Asset Liability Management Reporting, Performance Measurement, AttributionPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 60. ANALYTICAL PLATFORMS NEEDS 59 TRANSPARENT, COMPREHENSIVE, AND SCALABLE TM Must be designed to leverage the best technology and expertise to provide best-in-class solutions to optimize the following key concerns:  Transparent and comprehensive  Embracing modern technologies to overcome legacy platform issues  Incorporate valuation, attribution, scenario analysis & reporting Performance Scalability Fixed Income Equities Customization Usability Portfolio Alpha Mgmt Models Web-based Reporting Credit Risk Customizable Risk Models Analytics Mgmt Complex Rapid Deployment Securities & Derivatives Loans Multi-Entity High Availability Hosted Services, Cloud ComputingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 61. WORLD OF COMPLEXITY 60 Sophisticated Analytical & Execution Platform Needed Cross-Asset Class Capability Is Required for A Comprehensive Counterparty and Collateral Management System COMPLEXITY COMPLEX SECURITIES DERIVATIVES ILLIQUID LIQUID CONTINGENT CLAIMS SECURITIES AND DERIVATIVES RMBS CMBS Consumer ABS HY & IG Bonds Esoteric Assets LOANS/CREDITS Residential Commercial Consumer / Student Corporate Esoterics Contracts Mortgage Mortgage Loans Credit GRANULARITY Comprehensive state-of-the-art large scale analytical systems needed for valuation and risk management of complex securities and portfolios .  Credit intensive analysis is needed for most instruments to uncover risks not apparent from traditional analysis.  Forward-looking views and scenarios to  Multivariate stresses needed to be applied around forecasts to capture alternate future states of the world  Interest rates, currencies, defaults,PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 62. OPEN RISK SOLUTIONS 61 Next Generation Portfolio and Risk Management Platform  Integrated platform – open, flexible, connecting risk management, portfolio management, trading, collateral management, financial management and reporting  Multi-asset class covering, liquid, illiquid, complex and derivatives, US and international  Proprietary plus open-interface credit and factor models supporting risk management, alpha generation, TM and asset allocation Fixed Income Equity Derivatives Complex Stratus - Loan Portfolio Risk Alpha & Risk Portfolio Electronic Risk & Collateral Securities & Collateral Management Management Models Management Trading Valuation Management Esoterics ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 63. NEWOAK SOLUTIONS OpenRisk™ - OpenFixed 62 Next Generation Valuation & Risk Services  NewOak OpenRisk provides a comprehensive capabilities to managing multi-asset-class portfolios  Leveraging NewOak’s superior credit analytics and technology, NewOak can provide cost effective services across a variety of important functions: Deep-Dive Credit •See-through valuation, loss, cash flow analysis of structured products – RMBS, CMBS, CDO. CLO, Esoterics Analysis Risk Reporting •Risk reporting across first and second order sensitivities Cash Flow •Projected interest and principal (maturity, calls and prepayments) cash flows provided for static Forecasting (fixed-rate) and user defined dynamic scenarios (customizable shocks) Reinvestment Rate •The impact of changes in fixed rate and spread to benchmark upon projected cash flows Analysis Inflation Risk •Portfolio and asset class sensitivities to changes in realized and projected inflation rates Horizon Analysis •Projected return and forward-looking risk profile from user-defined interest rate shocks Drilldown Capability •Aggregate analytics provided at sector, subsector and cusip levels  With a customizable service model, NewOak can multiple deployment options:  Data Services  Hosted “Software-as-a-Service”  In-House installation and management.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 64. COUNTERPARTY RISK MANAGEMENT 63 Opportunities and Perils In Counterparty and Collateral ManagementSpectrum of complex documentation COUNTERPARTYinterpretation, computation, valuation, optimi CREDIT ANALYSISzation, and execution leads to challenges andopportunities for state-of-the-art collateralmanagement systems and operations CREDIT TIMELY EXPOSURES EXECUTION DERIVATIVES & LOANS COUNTERPARTY Future RISK Today MANAGEMENT Legacy OPTIMIZATION ISDA & CSA VALUATION & MonitoringPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 65. FLEXIBLE SYSTEM APPROACH TO REDUCE OPERATIONAL RISK 64 Collateral Management Capabilities Is Becoming A Requirement Systems to consolidate data across multiple Documentation Valuation/ platforms, sources and formats into a single Sensitivities integrated framework. CSA, Master Method ISDA, Scripti ng Agent Position Monitoring Tracking Cross Collateral Capability Dispute Simulation Resolution Liquidity Integrate Data from multiple sources and formats Management Optimization/ Credit Netting Rules-based workflow engine Customizable Reporting and Stratification of Portfolio Real-time reporting and status update Collect Collateral Web-based for global distribution Management & Analyze Reporting ExecutePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 66. TRANSPARENT VALUATION AND EXECUTION SYSTEM 65 Analytical and Execution Platform TM Comprehensive Platform: Asset Class Contribution 60 $ MM 40 OpenRisk™ has been designed to leverage the latest technologies and NewOak’s 20 expertise to provide best-in-class solutions. In addition, OpenRisk™ helps optimize the 0 following key concerns: Quarter Performance Scalability Expected Liabilities 6 Customization Usability $MM 4 2  Transparent and comprehensive 0  Embrace modern technologies to overcome legacy platform issues 2010-2 2010-3 2010-4 2011-1 2011-2 2011-3 2011-4 2012-1 2012-2 2012-3 2012-4 2013-1 2013-2 2013-3 2013-4 2014-1 2014-2 2014-3 2014-4 2015-1 2015-2 2015-3 Quarter Web-based Reporting Net Cash Flows Customizable Risk Models 60 $ MM 50 40 Rapid Deployment 30 20 Multi-Entity 10 0 -10 High Availability Quarter Hosted Services, Grid ComputingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 67. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 66 Collateral Management Services Extensive capabilities across all aspects of securities finance: • MRA/GMRA: Repurchase Agreements Repo • Core and Complex Fixed Income • Initial Margin ISDA • Margin Verification • FCM Exchange • DCM • Verification and Checking of Central Clearing Central • Cross Margining and Risk Based Margining Clearing MRA – Master Repo Agreement ; GMRA – Global MRAPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 68. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 67 Collateral Management Services: Stratus Repurchase Agreements: MRA and GMRA Modeling • Daily Mark to Market • Collateral Validation • Domestic and International • Complex Securities • Corporate Sovereigns • Multi-Counterparty • Tri PartyPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 69. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 68 Collateral Management Services: Stratus ISDA: Credit Support Annex Modeling • Daily Mark to Market • Collateral Validation • Initial Margin, Thresholds, Minimum Amounts • Risk-Based Margining • Cross MarginingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 70. COLLATERAL MANAGEMENT - OVERVIEW 69 DOCUMENTATION • ISDA and CSA • SUITABILITY • ENFORCEABILITY • OPERATIONALLY IMPLEMENATABILITY • MARK-TO-MARKET RULES • FREQUENCY INTERVALS • METHODOLOGY • VALUATION AGENT • NETTING RULES • NOTICE RULES • COLLATERAL POSTING RULES • ELIGIBLE COLLATERAL • HAIR CUTS • HYPOTHECATION AND REHYPOTHECATION RULES • DISPUTE MECHANISM • LIQUIDATION PROCEDURES  COLLATERAL MANAGEMENT MITIGATES COUNTERPARTY CREDIT RISK BUT INTRODUCES EFFECTSPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 71. GLOSSARY OF BASIC TERMS IN AN ISDA 70 Call & return amounts Credit Support Document (CSD) and Annex (CSA) Marked-to-Markets (MTM) Independent Amounts Minimum Transfer Amounts Netting Rules Threshold Amounts Valuation Percentage or (“Haircut”)PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 72. OPERATIONAL MAZE – COLLATERAL AND COUNTERPARTY MANAGEMENT 71 NEED FOR AN INTEGRATED FRONT, MIDDLE, AND BACK OFFICE SOLUTIONSTHE CREDIT CRISIS AND FINANCIAL REFORMHAS CREATED A MOUNTING DEMAND TO Front Office: Portfolio, Risk &ADDRESS THE COLLATERAL MANAGEMENT Trade ManagementISSUES AS AN INTEGRAL PART OF THEOVERALL RISK MANAGEMENT, TRADING, ANDCOUNTERPARTY MANAGEMENT Middle Office: Regulatory Reporting & Trade Compliance Processing, Clearing , Valuation, Collater al Management INTEGRATED APPROACH Counterparty Back Office: and Collateral Reporting, Performance Measurement, Attribution Management Future Today Legacy Liquidity, Credit & Asset Liability ManagementPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 73. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 72 Central Clearing and Industry Future Challenges Need to Provide transparency and independence for clients • Hybrid Role for Custodian (Initial margin in custodial account) Risk-Based Margining • Validation of models and methodology • Reconciliation Collateral Optimization • Economics and Risk • Costs and opportunities within managerial collateralPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 74. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 73 Collateral Management Services: Stratus : NewOak’s Integrated Approach to Collateral Management Technology Driven Solutions: • Customized Implementation: Multi: Entity, User, Jurisdiction • Credit Support Annex Modeling Independent Valuation and Risk of Securities and Derivatives: • Validation and Control • Reconciliation Risk-Based Margining: • Support for multiple methodologies and calculations • No Black BoxPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 75. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 74 Collateral Management Services: Stratus Management Margin Calculation Report  Process:  Reconciliation of trades and pricing.  Calculation of amounts relative to specific CSA terms.  Validation of pricing and risk analytics.  Senior Collateral Management Expertise.  Capture all necessary components for initial and variation margin.  Calculation of Collateral Movement, Reason and Amount.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 76. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 75 Collateral Management Services: Stratus Margin Management Calculation Report:PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 77. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 76 Collateral Management Services: Stratus Management Risk-Based Margin Calculation Report (VaR Margin):PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 78. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 77 Hedge fund Transparency Services State of the industry: FT April 2011: “Assets under management in the global hedge fund industry have soared to an all-time peak, surpassing the pre-crisis high thanks to the strongest investor inflows in years. The world’s hedge funds at present manage $2,002bn of client funds, according to Hedge Fund Research, the industry’s leading data provider. That comfortably exceeds the $1,930bn peak of June 2008, just months before the collapse of Lehman Brothers triggered big losses and huge investor redemptions in the industry’s worst-ever crisis. At its nadir, the hedge fund industry’s assets were just $1,330bn in the first quarter of 2009. The latest figures show growth over the past two years has been almost as rapid as at the height of the credit boom. Between end-2005 and end-2007, total assets managed rose by $763bn, compared with $689bn from trough to peak over the past 24 months.”PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 79. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 78 Hedge fund Transparency Services State of the industry: The industry continues to be dominated by a handful of big names. One 20th of the hedge fund groups control two-thirds of the industry’s total assets, according to HFR data. Stung by concerns over funds’ operational sophistication in the wake of the Madoff affair, investors have been wary of allocating to lesser-known names, marketers say. Investor have changed their approach to their asset class, demanding more in depth transparency as well as more frequently. The biggest investors have also moved assets to separately managed accounts but that is not economically viable for most. However transparency requires additional process and investment to make it useful. There is a pronounced need for outsourced assistance.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 80. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 79 Hedge fund Transparency Services State of the industry: According to a Boston Consulting Group Analysis, Annual spend on market risk is large; estimated at $7.3B worldwide.1 Largest spend within HF and asset manager segments; North America and Europe are critical markets. ASP offering represents significant cost savings for HF, FoHF and asset managers. • Annual operating spend of $2.3B (32%) and one time, up-front costs associated with implementing risk software of $5B (68%). Important criteria across segments are customization, flexibility, integration; Data management appears to be a key competitive differentiator.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 81. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 80 Hedge fund Transparency Services State of the industry: The Competitive Landscape has changed dramatically The current market opportunity:  In the aftermath of the credit crisis, intuitional investors have gone back into hedge funds after massive redemptions left the hedge fund market well below current levels.  Investors are seeking a different investment style with their hedge fund investments, greater and more frequent transparency and more focus on control of their investment and due diligence.  However, most institutional investors lack the infrastructure and resources to both accumulate and then reintegrate the position level information from the managers back into their investment process.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 82. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 81 Hedge fund Transparency Services State of the industry: This has led them to engage third party providers to assist with this process. However there has been some unsettling developments within this niche market of providing transparency services to institutional investors. Leading into the crisis, there were 3 main competitors in the hedge fund transparency space: • RiskMetrics: nearly 50% market share • MeasuRisk: nearly 30% market share • State Street/IFS: Nearly 20% market share These 3 had dedicated business to leverage their analytical capabilities to acquire the manager position and provide back various risk measures and other information describing exposures and volatility levels. While the 3 had very different strengths and weak nesses, their collective business facilitated information flows to investors from managers in an otherwise opaque and tightly controlled market.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 83. SOLUTIONS FOR THE CHANGING CAPITAL MARKETS LANDSCAPE 82 Hedge fund Transparency Services State of the industry: Today, the landscape has changed materially: RiskMetics and MeasuRisk were both sold to MSCI Barra. Quickly the intellectual property from MeasuRisk was folded into the RiskMetrics platform and their teams were either absorbed or disbanded. Simultaneously there has been a legion of defections the RiskMetrics staff, across the board from executive to core technology staff. The consensus from those departing is that Barra is not the environment to pursue a career outside of equities and indices, their core business. This has led to a diminished product and service set and can only portend to what will be in the near future as more investors place increased reliance on transparency services as part of their portfolio surveillance function.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 84. NOTICE 83 This presentation provides certain information regarding NEWOAK CAPITAL LLC. By accepting this presentation, the recipient agrees that it will use, and it will cause its directors, officers, employees, agents, professional advisors and representatives to use, the information herein for internal purposes only and will not divulge any such information to any other person without New Oak’s prior consent. The presentation is a general summary of NEWOAK CAPITAL LLC and its respective businesses, and does not purport to be a complete description of NEWOAK CAPITAL LLC, its respective businesses or its financial condition. This information was accurate as of the date of this presentation but views and outlooks may have changed. Neither NEWOAK CAPITAL LLC nor its representatives or affiliated make any representation or warranty as to the accuracy or completeness of this presentation, or the validity, completeness or accuracy of assumptions underlying any estimates or projections contained herein. No one assumes any duty to update this presentation or revise any of the statements contained herein, whether as a result of new information, future developments or otherwise. Non-factual statements, including those regarding possible future events (“forward looking statements”), constitute only subjective views and/or present intentions; are not representations or warranties; and are subject to change. These statements are necessarily speculative and arbitrary in nature, and investors should expect that some or all of the assumptions underlying these statements will not materialize, or will vary significantly from actual results. These variations may be material. There is no guarantee that views and opinions expressed in this presentation will be correct, and intentions to buy or sell particular securities investments or types of securities or investments in the future may change. The views expressed in this presentation were current as of the date of this report. Do not assume that every account managed by New Oak follows every investment strategy discussed in this presentation. Past performance is no guarantee of future results. Do not distribute this presentation in any manner to any third party without our prior written consent. This presentation should not be considered a recommendation to buy, sell or hold a security or investment and no one should rely upon it as research or investment advice.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 85. DISCLAIMER 84 The information in this document does not constitute an offer to sell or the solicitation of an offer to purchase any securities from any entities described herein. Any such offer will be made solely to qualified investors by means of private placement memoranda and related subscription materials. Such offer would not be registered under the U.S. Securities Act of 1933 (the “Act”), and any securities from such offer may not be offered or sold in the United States without registration under the Act or exemption thereunder. All information herein is subject to change without notice, revision or update. NewOak Capital Markets LLC (“NewOak”) makes no representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein is, or shall be relied upon as, a promise or representation, whether as to the past or the future, and any such reliance shall be unreasonable. This document is confidential and is intended solely for the information of the person to whom it has been delivered. It is not to be reproduced or distributed, in whole or in part, by any means, without the prior written consent of NewOak. Nothing contained herein should be construed as tax, accounting or legal advice. Any statements regarding past performance are not guarantees of future results. INVESTING IS SPECULATIVE AND INVOLVES RISK OF LOSS. YOU SHOULD REVIEW CAREFULLY ANY OFFERING MATERIALS, INCLUDING THE DESCRIPTION OF THE RISKS, FEES, EXPENSES, LIQUIDITY RESTRICTIONS AND OTHER TERMS BEFORE MAKING A DECISION TO INVEST. FORWARD-LOOKING STATEMENTS Any estimates and projections contained herein have been prepared by NewOak are not guarantees of future performance and involve significant elements of subjective judgment and analysis that are inherently subject to uncertainties and changes in circumstances. Some of the statements in this presentation may constitute forward-looking statements, and may be identified by the use of words such as “expect,” “plan,” “anticipate,” “intend,” “believe,” “seek,” “estimate,” “will,” “could,” “should,” “potential,” “designed” and similar words or negatives of same. Forward- looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained in this presentation involve risks and uncertainties, including but not limited to statements as to: • general volatility of the securities markets in which NewOak invests; • changes in business strategy; • availability, terms and deployment of capital; • availability of qualified personnel; • changes in the securities industry, interest rates, the debt securities markets or the general economy; • increased rates of default and/or decreased recovery rates on investments; • changes in governmental regulations, tax rates and similar matters; • changes in generally accepted accounting principles by standard-setting bodies; • availability of targeted investment opportunities; • the degree and nature of NewOak’s competition; and • other global, political, economic, business, competitive, market and regulatory forces. The forward-looking statements are based on the beliefs, assumptions and expectations of future performance, taking into account all relevant information currently available at NewOak. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to NewOak or are within its control. If a change occurs, the business, financial condition, liquidity and results of operations may vary materially from those expressed in the forward-looking statements. CERTAIN ASSUMPTIONS The expected returns set forth in this presentation are calculated based on various assumptions that NewOak believes to be reasonable under the circumstances or that have been provided by third parties NewOak deems reliable, although no warranty is made that such assumptions will prove to be correct, and other professionals may have differing assumptions. Such assumptions include, without limitation, the prepayment curve shape and interest rates. No assurance can be given that such returns can or will be achieved.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 86. 85 Appendix I. OpenRiskTMPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 87. NEWOAK SOLUTIONS OpenRisk™ 86 Fixed Income Risk Analytics Base risk analytics to describe portfolio metrics including credit analytics. Dynamic drilldown provides aggregate and security specific analyticsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 88. NEWOAK SOLUTIONS OpenRisk™ 87 Key Rate Sensitivities Calculation of key rate duration, customizable to a client’s specific needs and reportable at the portfolio any aggregate level.  Drilldown capabilities allows users to aggregate or drill-down to user defined sector, subsector, and CUSIP levelsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 89. NEWOAK SOLUTIONS OpenRisk™ 88 Dynamic Cash Flow Forecasting  Ability to dynamically generate portfolio and security specific cash flows (principal, interest, matured bonds, calls, puts and structured cash flows)  Aggregate cash flows by periods  User has the ability to change interest rate scenarios and periodicity assumptions driving cash flowsPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 90. NEWOAK SOLUTIONS OpenRisk™ 89 Reinvestment of Cash Flows and Assumptions  The ability to forecast variability of future reinvestment cash flow streams at a fixed rate or a spread to LIBOR or other benchmark.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 91. NEWOAK SOLUTIONS OpenRisk™ 90 Credit Analytics: RMBS  Provide comprehensive performance reporting across a database of 25+Millions residential mortgage loans  Users can customize their categorization by vintage, lien type, collateral type and characteristics  The RMBS Transition Matrix shows such statistics as % DQ30, DQ60, DQ90, FC, REO and Prepays on collateral, stratified by user-defined criteria.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 92. NEWOAK SOLUTIONS OpenRisk™ 91 Credit Analytics: RMBS Performance  The RMBS analytics allow users to look at both historical and projected performance, showing such statistics as % DQ30, DQ60, DQ90, FC, REO and Prepays on collateral, stratified by user-defined criteria  The RMBS Severity Matrix shows Loss Severity data on collateral, stratified by user-defined criteriaPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 93. NEWOAK SOLUTIONS OpenRisk™ 92 OpenRisk™ Portfolio Credit SummaryPortfolio My Test 1.12As of Date 8/31/2010Purpose ALL_SECURITY TYPES DEFAULT ASSUMPTIONS – YIELDClass Type CUSIP Description Coupon Maturity Original Par (#k) Current Par NAV (#k) % NAV Price Source (#k)TOTAL 10,961.68 6,895.10 4,710.66 100.00% 68.23ABS Auto Loan 90327MAC2 USAA0801 A3 4.16 4/15/2012 840.98 724.29 720.98 15.31% 99.36 NOC 14312UAD9 CARX0703 A4 5.32 2/15/2013 205.00 205.00 198.96 4.22% 96.82 NOC 44920NAF1 HYAR07A A4 5.21 3/15/2014 637.00 637.00 609.71 12.94% 95.48 NOC 65475FAD7 NART08A A3 3.89 8/15/2011 496.52 438.05 437.69 9.29% 99.74 NOC TOTAL 2,179.50 2,004.34 1,967.33 41.76% 97.95 Credit Card 161571AQ7 BOIT_1 05A7 4.55 1/15/2011 93.44 93.44 91.82 1.95% 98.06 NOC 14041NBX8 COET_1 05B1 4.9 2/15/2015 140.00 140.00 18.60 0.39% 13.07 NOC 14041NAZ4 COET_1 03C4 6 10/15/2010 200.00 200.00 15.92 0.34% 7.69 NOC TOTAL 433.44 433.44 126.34 2.68% 28.91 HELOC 881561WU4 TMT059HG M3 4.75 8/25/2035 45.62 11.08 0.30 0.01% 2.34 NOC 126671B21 CWHE03E NOTE 1M Libor + 26 7/15/2029 358.00 19.93 13.77 0.29% 69.07 NOC 126686AB0 CWHE06H 2A1A 1M Libor + 15 11/15/2036 100.00 40.22 20.54 0.44% 51.05 NOC 126673KQ4 CWHE04L 2A 1M Libor + 28 2/15/2034 86.86 7.44 4.78 0.10% 64.22 NOC 1266715Y8 CWHE04C NOTE 1M Libor + 22 1/15/2034 100.00 9.13 6.13 0.13% 67.17 NOC 12670CAA5 CWH0700C A 1M Libor + 15 5/15/2037 100.00 44.89 24.52 0.52% 54.61 NOC 126673KP6 CWHE04L 1A 1M Libor + 28 2/15/2034 160.00 15.65 10.84 0.23% 69.26 NOC 92906AAA7 GPHE06H1 UCF_AX 1M Libor + 17 3/12/2037 100.00 24.85 17.11 0.36% 68.83 NOC TOTAL 1,050.48 173.19 98.01 2.08% 56.54 TOTAL 3,663.43 2,610.98 2,191.68 46.53% 83.74RMBS Home Equity 36244KAG0 GSA06HE3 M2 1M Libor + 30 5/25/2046 45.62 45.62 21.54 0.46% 47.20 NOC 12667AAC0 CWHE0612 2A2 1M Libor + 15 7/25/2036 52.94 41.09 34.34 0.73% 83.56 NOC 126670YG7 CWHE0605 2A2 1M Libor + 18 9/25/2034 821.67 463.59 391.72 8.32% 84.49 NOC 805564QR5 SAST0403 A1A 1M Libor + 34 12/25/2034 409.00 21.29 12.19 0.26% 57.25 NOC 126670EY0 CWHE0512 4A 1M Libor + 28 2/25/2036 444.00 85.78 69.71 1.48% 81.26 NOC 86359BV24 SAS05WF1 M9 1M Libor + 230 2/25/2035 45.66 14.41 1.18 0.03% 8.17 NOC 805564SW2 SAST0503 M5 1M Libor + 65 11/25/2035 388.77 388.77 190.57 4.05% 49.00 NOC 004375BX8 ACCT0403 2M7 1M Libor + 250 10/25/2034 1,888.39 447.26 363.19 7.71% 81.16 NOC 126670NJ3 CWHE05B5 M5 1M Libor + 76 11/25/2035 231.00 231.00 124.12 2.63% 53.71 NOC 126670RL4 CWHE0517 MV8 1M Libor + 225 12/25/2035 6.01 6.01 1.55 0.03% 25.83 NOC 17312GAC5 CTM07AH3 A3C 1M Libor + 26 5/25/2037 769.60 769.60 424.50 9.01% 55.15 NOC 040104RJ2 ARS06W01 M2 1M Libor + 43 3/25/2036 806.20 806.20 342.01 7.26% 42.41 NOC 04542BMG4 ABF05WF1 M9 1M Libor + 170 2/25/2034 447.37 164.12 113.05 2.40% 68.85 NOC 073879VL9 BSHE05T1 M6 1M Libor + 170 5/25/2035 37.00 16.81 2.72 0.06% 16.13 NOC 04541GTP7 ABSH05H6 M5 1M Libor + 68 7/25/2035 243.00 243.00 143.55 3.05% 59.06 NOC 073879E38 BSHE05T2 M2 1M Libor + 67 8/25/2035 643.50 530.07 275.36 5.85% 51.93 NOC TOTAL 7,279.72 4,274.62 2,511.32 53.31% 58.73 Whole Loan 437690CH1 HMS04006 A3A 1M Libor + 55 1/25/2035 18.54 9.50 7.66 0.16% 80.61 NOC TOTAL 18.54 9.50 7.66 0.16% 80.61 TOTAL 7,298.26 4,284.12 2,518.98 53.47% 58.78TOTAL 10,961.68 6,895.10 4,710.66 100.00% 68.23PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 94. NEWOAK SOLUTIONS OpenRisk™ 93 OpenRisk™ Sample Reports – Forecasted Cash Flows for Single Asset ClassCusip : 004375BX8 Deal ID : ACCT0403 As Of Date : 4/30/2010Cusip 004375BX8Issuer Accredited Mortgage Loan TrustDeal Accredited Mortgage Loan Trust 2004-3Deal Type Home EquityCollateral Type SUBPRIME Forecasted Cash FlowsTranche Name 2M7Tranche Type MEZ_FLTOrig Moodys Baa3Orig SNP BBBMoodys Baa3SNPAssumption Scenario Price Yield DM Mod Avg Life Prin Wrdn Default Cum Loss Cum Loss Duration Curr Curr LifeCASH_RMBS_1 1 69.63279724 15 1290.266235 -0.5539692 4.356078148 0 29.92904663 16.44619942 4.083602905CASH_RMBS_2 2 69.77047729 15 1291.695068 -0.54490805 4.302575111 0 28.97035789 16.63384438 4.10709095CASH_RMBS_3 3 69.3677063 15 1289.519043 -0.55710852 4.407880306 0 29.5104847 17.58159828 4.225723267CASH_RMBS_4 4 68.82089233 15 1286.908936 -0.57872921 4.538986683 0 29.9769249 18.70564651 4.366422653CASH_RMBS_5 5 68.07893372 15 1283.067749 -0.59682333 4.742804527 0 30.35211945 19.33748436 4.445511818 PROPRIETARY AND CONFIDENTIAL ©2011 NewOak Capital LLC. All rights reserved.
  • 95. NEWOAK SOLUTIONS OpenRisk™ - OpenEquity 94 Portfolio Manager Workstation “PMW” OpenRisk provides an advanced equity management trading portal; The equity portfolio manager workstation (OpenEquity) is targeted towards investors worldwide. Portfolio This comprehensive suite of trading tools, covers front to Manager back-office processes with specific emphasis on: Workstation Customized Portfolio Manager Workstation Equity Alpha Powerful Alpha Signaling Trading OpenEquity Signaling Portfolio Robust Risk Management Management Workstation (PWM”) Sophisticated Equity Trading Seamless Back-Office Processing Back-Office Risk Processing Modeling Our advanced trading solutions product facilitates investors’ investment decision making processes to help generate superior returns on investments.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 96. NEWOAK SOLUTIONS OpenRisk™ - Equity 95 Portfolio Manager Workstation Portfolio Alpha Risk Back-Office Manager ALTRON Signaling Modeling Processing WorkstationThe Portfolio Manager Workstation provides an extensive array of Benefits to investors:tools combining the data sources needed to make informed Integrated Pre-Trade Analysisinvestment decisions that yields profitable results. •Equity positions, dollar balances, industry weightings, risk exposures, non-linear transaction cost estimatesThe platform employs a fully customized user interface (UI) thatintegrates seamlessly into any Microsoft infrastructure. Real-Time Analytics •Equity pricing, currency rates, and textual news that converts into measureable sentiment sources Surveillance Tools •Provides investors a disciplined method to monitor a stock news and incorporate that in its alpha and risk measures Custom Alpha Signals •Choose investment style, horizons, and regions to invest Integrated into Portfolio Manager Workstation •Identify risk exposure levels, view signals at granular levels, and make trade decisions on a seamless platformPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 97. NEWOAK SOLUTIONS OpenRisk™ - Equity 96 Portfolio Manager Workstation: Alpha Signaling Portfolio Alpha Risk Back-Office Manager ALTRON Signaling Modeling Processing Workstation Annualized Alpha Our proven alpha generating can be tailored to your specific 8.0% 6.72% investment style, with a proven track record. 6.0% 5.02% 3.83% 4.0% 3.21% The Alpha Signal capability supports investing in both 2.0% domestic and international strategies worldwide. 0.0% Benefits to investors: -2.0% -4.0% International Strategy R E eal state Strategy Leveraged M arket U .S .S trategy Custom Alpha Signals Neutral Anualized Alpha • Choose investment style, horizons, and regions to invest DISCLIAMER: Since fund inception through November 30, 2010. Integrated into Portfolio Manager Workstation The fund Benchmark changed from the Bank of New York ADR Index to the FTSE All World ex. US Index on 1/1/2007 to reflect the expansion of the portfolio’s composition. Data referring to the “Benchmark” refers to the Benchmark that was in effect at the time in question. • Identify risk exposure levels, view signals at granular levels, and The performance of the various Strategies presented herein are based upon a composite. A composite is an aggregation of one or more portfolios into a single group that represents a particular make trade decisions on a seamless platform investment objective or strategy. Composite returns are calculated based on Global Investment Performance Standards (GIPS), are based upon the asset weighted average of the component portfolios returns using beginning-of-period values, are calculated after the deduction of actual Dialogue with Alpha Equity Management trading expenses incurred during the period, and are reported net of fees. A complete list and description of the firms composites, including fee schedules and policies for calculating and colleagues reporting returns, are available upon request. COMPOSITE STRATEGIES ARE OPEN TO SEPARATELY MANAGED ACCOUNTS ONLY. • Discuss specific alpha factor needs with researchers and portfolio managers, at Alpha EquityPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 98. NEWOAK SOLUTIONS OpenRisk™ - Equity 97 Portfolio Manager Workstation: Equity and Currency Risk Modeling Portfolio Alpha Risk Back-Office Manager ALTRON Signaling Modeling Processing Workstation Our risk management platform contains a suite of tools REPRESENTATIVE DETAILED ATTRIBUTION that range from real-time sensitivity analysis to Return from Alpha portfolio attribution reporting. Model Return from Trading The custom risk modeling enables daily risk calculations Return from Risk at the stock level aggregated to the portfolio level for Factors Return from Sector the including: Weights Return from Currencies  Industry, sector, and region Expenses  Beta, size, and style Return from Region  Oil, interest rates, and currencies Weights -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% Benefits: Illustrative Risk Decomposition For International Equity Strategy  Identifies risk contribution for each trade Portfolio Benchmark Active Factor Variance  Ensures risk exposure tolerances are sustained Risk Factor CONTINENTAL EUROPE Exposure 0.00 Exposure 0.01 Exposure (0.01) Variance 386.99 Contribution 0.18  Calculates detailed portfolio attribution ENGLISH-SPEAKING COUNTRIES SOUTH AMERICA & MEXICO 0.01 0.01 (0.00) 0.01 0.01 (0.00) 362.00 339.25 (0.14) 0.03  Archives data for regulatory agency demands ASIA INDUSTRIAL SECTOR 0.04 0.35 0.04 0.19 0.00 0.15 448.21 495.01 (0.03) (1.57)  Produces in-depth reporting capabilities CONSUMER SECTOR TECHNOLOGY&HEALTH SECTOR 0.09 0.13 0.14 0.13 (0.06) (0.00) 247.76 283.12 0.69 0.01 INTEREST RATE SENSITIVE SECTOR 0.25 0.34 (0.10) 387.06 1.94 NON-ENERGY MINERALS 0.06 0.08 (0.01) 910.28 0.10 Our risk modeling techniques allow investors to ENERGY MINERAL SECTOR OIL PRICES IN USD 0.09 (0.04) 0.09 (0.03) (0.00) (0.01) 491.94 1,255.90 0.03 0.08 manage their risk real-time for better decisions and DEVELOPING MARKET SIZE 0.02 (0.15) 0.06 (0.07) (0.04) (0.08) 176.16 63.18 0.51 0.63 transparencies VALUE/GROWTH (0.22) (0.39) 0.17 7.44 0.14 Factor Tracking Variance 6.33 Stock Specific Tracking Variance 12.59 Total Tracking Variance 18.91 Tracking Error 4.35PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 99. NEWOAK SOLUTIONS OpenRisk™ - Equity 98 Portfolio Manager Workstation: Advanced Electronic Trading Portfolio Alpha Risk Back-Office Manager ALTRON Signaling Modeling Processing Workstation Portfolio Manager Workstation is fully integrated with “ALTRON”, ITG’s award winning Triton Trade execution platform, co-developed by NewOak Capital and ITG. Key Benefits Include:  Broker-neutral global market and algorithm access  List and single stock trading tools  Extensive customization capabilities  Independent post transaction cost analysis  Fully integrated front to back-office operations processing ALTRON empowers the investor to determine the right strategy to trade worldwide.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 100. NEWOAK SOLUTIONS OpenRisk™ - Equity 99 Portfolio Manager Workstation: Back Office Services Portfolio Alpha Risk Back-Office Manager ALTRON Signaling Modeling Processing Workstation Back-office processing sends equity, fixed Clearing Executing Brokers Institutions/Custodians income and currency trades to custodians in a seamless, straightforward process Domestic Prime Brokers Operations personnel provide the following • Domestic • State Street services: • BNY Mellon • J.P. Morgan  Corporate Actions • Deutsche Bank • Morgan Stanley  Position Reconciliation • UNX • Pershing  Positions Repository • ITG • UBS • Instinet  Trade Verifications with all Clearing Institutions International Administrative Services  Currency Transactions • J.P. Morgan • State Street The Integrated Equity Management Solutions • Morgan Stanley • KPMG system provides everything you need: software, • ITG • Madison Grey market data, and back-office operation services • Instinet • Bison Financial Services • UBS • GH&IPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 101. 100 Appendix II. Investment Support ServicesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 102. NEWOAK ‘S COLLATERAL AND COUNTERPARTY RISK MANAGEMENT 101 NewOak’s counterparty and collateral management offers an advantage in asset management Spectrum of complex documentation interpretation, computation, valuation, optimization, and execution leads to challenges and opportunities for state-of-the-art collateral management systems and operations Alternative asset management requires sophisticated infrastructure for collateral and counterparty management COUNTERPARTY CREDIT ANALYSIS CREDIT EXPOSURES OPTIMIZATION DERIVATIVES & LOANS COUNTERPARTY RISK MANAGEMENT VALUATION & ISDA & CSA MONITORINGPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 103. 102 NEWOAK ASSET MANAGEMENT PORTAL SOLUTIONS NewOak Solutions: Front to Back Solutions Asset Management Support Services Front Office Middle Office Back Office Pre & Post Trade Analytics. Trade Support Services Investor Reporting. Trade Capture and Portfolio Accounting Support:  Confirmation Management. Independent Valuation for NAV.. Risk Management Analytics:  Reconciliation Reporting: Performance Fixed income and Equity.  Portfolio Pricing Exposure Equity Portfolio Style Factor Compliance analysis.  Profit / Loss Analysis Transaction Cost Analysis Equity Order Management and  Collateral Management Benchmark Relative Reporting execution.  Reporting Benchmark Relative analysis. Scenario and Stress Testing.PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 104. NEWOAK ASSET MANAGEMENT PORTAL SOLUTIONS 103 NewOak Solutions: Front Office Asset Management Support Services Front Office Services Middle Office Services Back Office Integration • Decision Support Infrastructure: Fixed Income •Pre and Post Trade Analytics •Portfolio Management •Risk Management Structured •Market and credit risk Securities •Domestic & international • Execution Infrastructure: Assumption Vectos Equity • Trade Execution • Transaction Cost Analysis and Optimization DerivativesPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 105. NEWOAK ASSET MANAGEMENT PORTAL SOLUTIONS 104 NewOak Solutions: Analytics Asset Management Support Services Front Office Services Middle Office Services Back Office Services Independent Valuation Collateral Management: •Reconciliation to prime brokers and CSA agreements •Collateral Challenges Attribution Reporting: •Performance across fixed and equity Customized investor reporting: •Performance Reporting •Compliance Reporting •Benchmark Relative Performance and Exposure Reporting Portfolio Monthly Active Factor Factor Return Exposure Return Contribution Currencies 1 - Europe xUK -3.74% 1.57% -0.06% 2 - UK & Ireland 4.11% 1.50% 0.06% 3 - Australia/New Zealand 1.02% 1.23% 0.01% 4 - Asia Pacific xJapan, A&NZ -1.24% 0.94% -0.01% Total Currencies -1.31% 0.11%PROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 106. NEWOAK ASSET MANAGEMENT PORTAL SOLUTIONS 105 NewOak Solutions: Strategic Services Asset Management Support Services Back Office Front Office Middle Office Integration • Full Integration with third party custodians and administrators for complete front to back capabilityPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 107. NEWOAK SOLUTIONS OpenRisk™ - Stratus 106 Stratus: The Intelligent Loan and Collateral Management System Origination Collateral Documentation Characteristic Legal Key Documents & Underwriting Data Files Variables Stratus Ongoing Collateral Management Expression performance, engines, alert roll & Reporting Process Flow s, etc. rates, cash Ongoing flows Surveillance And Control Reports Collect Analyze ExecutePROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.
  • 108. NEWOAK SOLUTIONS OpenRisk™ - Stratus 107 Collateral Management Services: Stratus  Extensive capabilities across all aspects of securities finance: • MRA/GMRA: Repurchase Agreements Repo • Core and Complex Fixed Income • Initial Margin ISDA • Margin Verification michael.london@yahoo.com • FCM Exchange • DCM • Verification and Checking of Central Clearing Central • Cross Margining and Risk Based Margining ClearingPROPRIETARY AND CONFIDENTIAL©2011 NewOak Capital LLC. All rights reserved.