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Investment Strategy in an Era of High Market Volatility

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Investment strategy for consistent high returns and low risk. Ideal for financial markets that have high volatility and no definite trend. In operation since October 2010, yielding a consistent return of +/-2% per month.

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Investment Strategy in an Era of High Market Volatility

  1. 1. Investment strategy in an era ofhigh volatility and no market direction
  2. 2. Timing is everythingversustiming is worthlessWith almost every indicatorpositively correlated, thetiming of buying and sellingsecurities demands a newinvestment decisionstrategy.If all indicators are bullishwe can definitively state thatthere is a very highprobability that they willturn bearish, we just cannotsay when.
  3. 3. Trend lines go nowhere.Performance tanks but claims persist. I In this market everystrategy based onpredictive behaviour ofthe market is doingrelatively poorly and atthe same time everyportfolio manager hasan index to measurethemselves favourablyagainst.
  4. 4.  You are not in safe handsThe safe nest ofcapital preservation iscrackedThe era of buy qualityassets and hold is over.To maintain asset valueabove the rate of inflationdemands an investmentstrategy that waspreviously defined as‘excessively risky’.To sit and wait for themarket to stabilize andregain a firm secularbullish trend is the new’risk’.
  5. 5. Hedge funds not on arollThe hedge funds have notperformed wellComplexity of structuredproducts have not yieldedany market advantageMulti-Strategy Hedge fundIndex for 2011 was underwater
  6. 6. A redefinition of riskand uncertaintyAs systems evolve, they getmore complex. (WTO, Eurocurrency zone, BRICS)As systems become morecomplex they become moreunstableAs systems become moreunstable the components ofthe system must becomemore flexibleTherefore, new flexiblestrategies are needed
  7. 7. A new investmentstrategy  An Iterative strategyTechnical trading will stratenot work.Looking for trends willonly frustrateSitting on cash willresult in loses toinflation.Let the market come toyou. Find appropriatestrategies for particularmoments.
  8. 8. Make a series of shortterm decisionsDo Not: holdcash, predict theeconomy, identify the nextdisaster, chase themarket, follow thecash, panic and/or despair.DO develop strategiesthat exploit volatility in ano direction market andprotects your portfoliofrom unnecessary risk. Beliquid and ready for thereturn of a secular boom.
  9. 9. RBC auto-callableNotes are thefoundation investmentWhat are the  RBC Auto-Callable Phoenix Notes:features of these bank issued equity linked notes that are not principal protected. They representbonds? senior, uninsured deposit obligations of the Royal Bank of Canada.  Coupon payments, monthly or quarterly  Automatically callable at observation periods depending on the performance of the underlying assets  Conditionally principal protected at maturity
  10. 10. WOF Phoenix howdoes it operate?Please open your first hand out
  11. 11. Step 1: Select theappropriate Bond1: single , pairs, triples orcomposite2: term ; 8 months, year18 months, or longer3: coupon rate 10 to 20 %4: floor: 50% to 80%5. benchmark dates:monthly quarterly,6: redemption terms; Rcash or kind  e p r e s e n t
  12. 12. Three year range  Rim ( red) is rejectedanalysis of target Blue  AAPL,WFC,MSFT,APPL,JPMchip stocks ,GE,FCX,,CAT, AMZN, KO , VALE, PBR are accepted
  13. 13. Step 2: Multiplepurchases of WOFcallable Phoenix bondsGuidelines :1. Avoid duplication2. Vary call dates and terms3. Diversify sectors4. Include complements in pairs or triplets5. Purchase monthly6. Diversify into international markets 
  14. 14. Step 3: Acquire leveragefrom bank using WOF  Bank leveragePhoenix contract ascollateralIn order to increase therate of return, aleveraging exercise iscritical.Leveraged debt createscurrency hedge
  15. 15. Step 4: Use call spread optionstrategy to exploit volatility tomaximize monthly returnMonthly/quarterly returnon portfolio of bonds assuredif contract above floor onmeasurement dayIf any stock is under wateras it approachesmeasurement moment, anoption spread strategy isimplemented, to maximizereturns.Option spread contractcollapsed once monthlymeasurement date is passedor wait until contract expires.
  16. 16.  Negative CorrelatesStep 5: Minimize risk ofcapital loss at maturity ofWOF bondAs long as stock price atmaturity is above floor, 100%capital returnedIf stock is belowfloor, purchase options ofnegative correlate to coverthe potential loss at maturityIf market is in bearcycle, then determine thebest fit; (gold, VIXTBs, Euro/US) to include inoption purchase. Objective tolose no more than 50% ofpotential loss upon maturity.
  17. 17. BoB’s performancesince January 2011Please open your second hand out
  18. 18. % Away % Away Initial Final Periodic Barrier From Barrier From Valuation Valuation Description $ Invested Yield Stock 1 Initial Price LAST Price Barrier Stock 2 Initial Price LAST Price Barrier Date Date SettlementWFC/MSFT 2 yr Monthly pay70% barrier $ 250,000 1.22% WFC-us $ 31.81 $ 28.59 $ 22.27 20% MSFT-us $ 28.47 $ 27.47 $ 19.93 26% 19-Jan-11 22-Jan-13 CashAPPL/JPM 6mnth Monthly pay CLOSED80% barrier $ 100,000 1.35% AAPL-us $ 342.62 $ 414.54 $ 274.10 41% JPM-us $ 45.96 $ 34.78 $ 36.77 -4% 23-Feb-11 8/23/2011 PhysicalSLB/POT 1 yr Monthly pay 65%barrier $ 100,000 1.02% SLB-us $ 93.26 $ 68.20 $ 60.62 8% POT-us $ 58.93 $ 43.44 $ 38.30 9% 31-Mar-11 02-Apr-12 Cash/PhysicalGE/FCX 1 yr Monthly pay 70%barrier $ 100,000 1.55% GE-us $ 20.53 $ 18.40 $ 14.37 20% FCX-us $ 55.77 $ 39.24 $ 39.04 0% 04-Apr-11 04-Apr-12 Cash/PhysicalCAT/AMZN 1 yr Monthly pay 70%barrier $ 100,000 1.30% CAT-us $ 108.85 $ 94.64 $ 76.20 17% AMZN-us $ 185.42 $ 175.85 $ 129.79 25% 25-Apr-11 25-Apr-12 Cash/PhysicalGDX/KO 1 yr Monthly pay 65% CLOSEDbarrier $ 100,000 0.95% GDX-us $ 60.27 $ 64.11 $ 39.18 41% KO-us $ 68.17 $ 71.23 $ 44.31 39% 16-Aug-11 09/16/2011 Cash/PhysicalVALE/PBR 1 yr Monthly pay 70% Closedbarrier $ 100,000 2.50% VALE-us $ 23.87 $ 25.41 $ 16.71 36% PBR-us $ 23.30 $ 27.01 $ 16.31 46% 29-Sep-11 10/31/2011 Cash/PhysicalVALE/PBR 1 yr Monthly pay 70%barrier $ 100,000 2.29% VALE-us $ 24.61 $ 22.86 $ 17.23 23% PBR-us $ 26.17 $ 26.23 $ 18.32 30% 01-Nov-11 16-Nov-12 Cash/PhysicalAAPL 18mnth Quarterly pay 70%barrier $ 100,000 3.25% AAPL-us $ 366.99 $ 414.54 $ 256.89 43% 23-Nov-11 23-May-13 Cash/Physical
  19. 19. Total Initial Price Last Price Spent/Rec Current # per per eived on Value of Gain % Gain Total Gain Expiration Hedges $ Invested Contracts Ticker Contract Contract Hedge Hedge (Loss) (Loss) (Loss) Date Settlement Lloyd Baron Hedge: 15 US Treasuries (TLT)1 #8120176022 Sept. $100 strike Calls $ 9,150 15 TLT1117I100-US 6.10 $ 10.45 $ 9,150 $ 15,675 $ $ 4.35 71% $ 6,525 16-Sep-11 Cash Lloyd Baron Hedge: 5 Gold (GLD-us) Sept2 #8120176022 $160 strike Calls $ 5,500 5 GLD1117I160-US11.00 $ 21.60 $ 5,500 $ 10,800 $ 10.60 $ 96% $ 5,300 16-Sep-11 Cash Subtotal: $ 14,650 $ 14,650 $ 26,475 $ 11,825 Lloyd Baron Hedge: Sold 10 FCX-us October3 #8120176022 36 strike Calls $ 1,000 (10) FCX1122J36-US 1.00 $ $ 0.29 $ 1,000 $ 290 $ 0.71 71% $ 710 21-Oct-11 Cash Lloyd Baron Hedge: Bought 10 FCX-us4 #8120176022 October 40 strike Calls $ (300) 10 FCX1122J40-US 0.30 $ $ - $ (300) $ - $ (0.30) -100% $ (300) 21-Oct-11 Cash Subtotal: $ 700 $ 700 $ 290 $ 410 Lloyd Baron Hedge: Sold 10 FCX-us November5 #8120176022 37 strike Calls $ 1,830 (10) FCX1119K37-US 1.83 $ $ - $ 1,830 $ - $ 1.83 100% $ 1,830 18-Nov-11 Cash Lloyd Baron Hedge: Bought 10 FCX-us6 #8120176022 November 40 strike Calls $ (730) 10 FCX1119K40-US 0.73 $ $ - $ (730) $ - $ (0.73) -100% $ (730) 18-Nov-11 Cash Subtotal: $ 1,100 $ 1,100 $ - $ 1,100 Lloyd Baron Hedge: Sold 10 FCX-us7 #8120176022 December 37 strike Calls $ 1,101 (10) FCX1117L37-US 1.10 $ $ 0.75 $ 1,101 $ 750 $ 0.35 32% $ 351 17-Dec-11 Cash Lloyd Baron Hedge: Bought 10 FCX-us8 #8120176022 December 40 strike Calls $ (361) 10 FCX1117L40-US 0.36 $ $ 0.01 $ (361) $ (10) $ (0.35) -97% $ (351) 17-Dec-11 Cash Subtotal: $ 740 $ 740 $ 740 $ - Lloyd Baron Hedge: Sold 10 FCX-us January9 #8120176022 37.50 strike Calls $ 1,800 (10) FCX1221A37.5-US1.80 $ $ 2.42 $ 1,800 $ 2,420 $ (0.62) -34% $ (620) 21-Jan-12 Cash Lloyd Baron Hedge: Bought 10 FCX-us10 #8120176022 January 39.50 strike Calls $ (940) 10 FCX1221A39.5-US0.94 $ $ 1.14 $ (940) $ (1,140) $ 0.20 21% $ 200 21-Jan-12 Cash Subtotal: $ 860 $ 860 $ 1,280 $ (420)
  20. 20. Interest Payments Client Description Received Interest Periods: Total: Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12Horizon PacificInternational WFC/MSFT 2 yr Monthly pay#8120176428 70% barrier $ 36,600 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050 $ 3,050Lloyd Baron APPL/JPM 6mnth Monthly pay#8120176022 80% barrier $ 8,100 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350Lloyd Baron SLB/POT 1 yr Monthly pay 65%#8120176022 barrier $ 8,160 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020Lloyd Baron GE/FCX 1 yr Monthly pay 70%#8120176022 barrier $ 12,400 $ 1,550 $ 1,550 $ 1,550 $ 1,550 $ 1,550 $ 1,550 $ 1,550 $ 1,550Lloyd Baron CAT/AMZN 1 yr Monthly pay 70%#8120176022 barrier $ 10,400 $ 1,300 $ 1,300 $ 1,300 $ 1,300 $ 1,300 $ 1,300 $ 1,300 $ 1,300Lloyd Baron GDX/KO 1 yr Monthly pay 65%#8120176022 barrier $ 950 $ 950Lloyd Baron VALE/PBR 1 yr Monthly pay 70%#8120176022 barrier $ 2,500 $ 2,500Lloyd Baron#8120176022 $ 4,580 $ 2,290 $ 2,290Lloyd Baron AAPL 18mnth Quarterly pay 70%#8120176022 barrier $ -Sub Total Revenue: $ 83,690 $ 3,050 $ 4,400 $ 4,400 $ 6,970 $ 8,270 $ 8,270 $ 8,270 $ 7,870 $ 4,350 $ 9,420 $ 9,210 $ 9,210
  21. 21.  Projection for 2012-2013
  22. 22. Objective: to create a$12 million BoB fund  Prescription for ExpansionBenefits:Choose bonds in primarymarketDiversify to targeted bluechip stocksCreate new flexible contractswith specific parametersLower commission feesGenerate higher profits

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