1. Systematic Global Market Trend (SGMT) Investment Process
For Prospect Investors
March 21, 2015
Systematic Global Market Trend (SGMT) Investment Strategy
SGMT investment strategy is a market based macro trend investment system which identifies
macro trends as well as associated risk profiles from the market prices of actively traded
financial products in major global capital markets and uses the information profiles to
integrate an active market risk management with investment decisions for alpha generation.
SGMT approach is market based, meaning the active prices from major global markets are the
best information sources for identifying the macro trends of global economies and capital
flows, instead of the past prices or economic data used widely by investment community. The
SGMT approach extracts market information from global markets that cross over to a different
market where the investment positions are established. In SGMT’s terms, the market in which
the investment is established is called “position market” and the markets for extracting
information are called “crossover markets.” In SGMT’s view, the investment positions are the
derivatives of crossover global markets information. This separation of position and crossover
markets is critical for SGMT to become “market based” so that the calculation of position
market investment is more like an option pricing model instead of like a system that uses data
fitting widely used by most other trend investment strategies. SGMT approach exposes
investors to market risk only and therefore is required to have investment selection rules to
manage market risks without exposures to other risks, e.g. liquidity, credit risks. SGMT has a
strict investment process that governs the position limits and risk exposures based on the
rigorous risk management and research disciplines. SGMT is a proprietary system of SGMT
Capital developed over multi-decades of capital markets experience as well as more than a
decade of extensive quantitative research and tests.
SGMT Investment Process
SGMT investment process starts with the selection of a base currency. The base currency must
have a wide spectrum of matured capital markets and investment instruments with deep
liquidities and least idiosyncrasies. There are only a few world currencies to meet the
requirement. Currently SMGT’s only established base currency is USD.
An important aspect of SGMT’s investment process is SGMT’s proprietary research which
considers both return and risk in the selection of market positions in the base currency and
other crossover markets, normally OTC or future markets with a wide spectrum of capital
market risk pricing for macro and capital flow trends. SGMT’s proprietary methods and tools
are used in this research to examine if the macro trend information of the crossover markets
exists and is numerically stable and then to study the cause and effects to identify if price
delays exist in the position market relative to the crossover markets. The cause and effect
stage is where historical market price data in both position and crossover markets becomes
useful. With SGMT’s selection research information, intraday global market prices are used in
numerical solutions to SGMT’s proprietary model. Only then back tests are performed exactly
as the model would be used in investment with real-time data feeds. As of the date of this

2. writing, SGMT had established six position market currencies in currency future market that
meet the rigor of our research and investment disciplines. The six currency futures are
Canadian Dollar (CAD), European Currency (EUR), British Pound (GBP), Swiss Franc (CHF),
Japanese Yen (JPY) and Australian Dollar (AUD). There are three potential position
instruments of USD base in research process currently. Any added position market in future
will follow the same rigor of disciplines, tests and risk management rules that minimize non-
market related risks.
The SGMT proprietary model is developed to profit from the research on the crossover of the
global markets and the position market. From a perspective of the markets, today’s world can
be seen as a set of disjointed but quasi-independent states linked together via financial
markets. While there are delays in the linkages, ultimately the system moves towards a
saddle state (temporary stationary state, see saddle point reference in wikipedia) by market
forces reflecting global economic conditions. Our model exploits this real-time crossover
market information to identify saddle states in the linkages to the real-time position market
by systematically calculating the difference between where the saddle state should be and
where we are currently at. All trade signals from the SMGT model are made to profit from this
move towards this saddle state. The model is intrinsically net long gamma since volatility
creates dislocations in markets and therefore presents trade opportunities as the system tries
to move towards saddle state. It should be noted that the market information associated with
saddle states has numerically rich risk information that our investment model uses to manage
the market risk by controlling effective leverage. As long as the markets are efficient and
effective pricing sources of economic or non-economic events, our investment model
constantly performs the risk adjusted macro trends from the global markets. In the rare case
of sudden unanticipated dislocation of markets (i.e., events not at all priced in by markets),
our investment strategy faces idiosyncrasy business risks like any other businesses with
different types and degrees of idiosyncratic risks.
SGMT Investment Position and Market Risk Management
After the position market and its crossover global markets are established by the investment
process outlined above, market risk management is integrated into the position leverage
based on SGMT model’s numerical solutions for market risk profiles. SGMT offers three levels
of maximum leverage that scale and control the magnitude of risk to meet investor’s risk
tolerance. These levels are based on investment manager’s capital market experience and the
SGMT models capital safety with value-at-risk equivalence to absorb tail market risks or
multiple idiosyncrasy risks for a position carrying capital market trading business. These three
levels are: Level I or “Conservative” with maximum leverage 4, Level II or “Standard” with
maximum leverage 6 and Level III or “Aggressive” with maximum leverage 10. SGMT offers
the “Standard” level to most investors. SGMT advisor will help investor to pick or offer
customized maximum leverage level. In any case, SGMT does not allow investors to customize
the proprietary position risk management in the core model and discourages frequent change
of maximum leverage level by investors.
!
!

3. SGMT Investment idiosyncrasy Risks
Idiosyncratic risk is completely unanticipated business risk which lies outside normal market
function. With strong risk management in SGMT’s investment process, the main source of
SGMT strategy’s idiosyncratic risks is from rare events that have not been properly priced in
the global markets. Indeed the following idiosyncratic risk example occurred only once in
over forty years (since 1972 USD decoupled from gold standard). As outlined above, SGMT
investment process has strict risk management to limit idiosyncratic risks within the market
risk domain.
The idiosyncratic risk example referred here is the Swiss National Bank (SNB) decision on Jan
15, 2015 to de-peg the Swiss Franc (CHF) from the Euro. The SNB had only two days earlier
promised to continue pegging the Swiss Franc (CHF) to the Euro. But suddenly on Jan 15th,
they ate their own words and shocked the market with a sudden withdrawal of the peg. The
SNB’s move was exceptional because it was an arbitrary and non-transparent policy change by
a major central bank. We see the SNB event as a one-off case rather than an example to be
followed by other central banks as we evidenced FED, ECB, BOJ and Canadian actions. Central
banks can take sudden action to intervene in their currencies and interest rates, but policies
and policy expectations are clearly communicated to markets as policy expectations are
priced in the markets. The SNB event was a rare business risk that no one or no model was
able to predict. It would be lucky to avoid such event in the market where no such policy
guidance existed and was priced.
Market based investment strategies exploit market information in world capital markets and
so can only react to information available to them. They are market and economically
rational and fundamental approaches. The irrational and sudden move by the SNB was not
known to the market so could not have been known by any market based investment
approaches.
SGMT in actual trading was negatively affected by the SNB event since it was caught on the
wrong side by the idiosyncratic risk but SGMT’s integrated risk management took action on
that day, cutting the position by 33%. On the same day when the markets were pricing such
event, SGMT model extracted market information of further weakness in Swiss macro
conditions because no one can see the SNB’s action bringing any positive effect to
Switzerland. After the shock of the SNB Bank move, the SGMT model went on to make money
in all currencies, including the Swiss currency, from the subsequent chaos in the market and
returned a positive 2% for the Standard investment in January.
The SNB Swiss Franc unpegging is an example of the way SGMT strategy was able to deal with
idiosyncratic risk without any immediate danger of unrecoverable loss. Idiosyncratic risk is
also reduced by the model’s diversification across the six main currencies. The volatility
unleashed by the Swiss Franc action created opportunities in the other currencies with which
the model can react to and profit from as was the case in January 2015.
!