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Crespi Volatility Management Program

Crespi Volatility Management Program. Investment Objective & Approach. Investment Objective: Targeted returns of 15–20% per annum with equivalent levels of risk Approach:

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Crespi Volatility Management Program

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  1. Crespi Volatility Management Program

  2. Investment Objective & Approach • Investment Objective: Targeted returns of 15–20% per annumwith equivalent levels of risk • Approach: • Construct option-based portfolios that are designed to profit from the relationship between price implied volatility& realized market volatility; • Maintain neutral underlying market exposure over time; • Employ stringent risk controls.

  3. Why an Options-Based Strategy? • What is the Opportunity? • Structural & persistent: options are priced based on expectations; • Sources of profit: time value & the spread between price-implied & realized volatility, actively manage all other risks. • Why does the Opportunity Persist? • A premium is earned in a risk-transference market • What are the Risks? • Market exposure: this is the focus of our risk management. • Why does it fit in a portfolio? • This type of strategy has a low to negative correlation with broad markets, as well as other absolute return strategies.

  4. Why an Options-Based Strategy? A key element in option pricing is “price-implied volatility”. • Option pricing requires an estimate of price probability – based on:, • A key element in option risk is market volatility (realized) • Underlying asset price movements determine an option’s profitability. • Relationship between price implied volatility & realized volatility: • On average, price implied volatility >realized volatility • Relationship changes over time: (1) Wider spread (2) Inversion • This relationship determines the success of any option-based strategy.

  5. Source: Chicago Board Options Exchange Why Does the Opportunity Persist? Implied Volatility vs. Actual Market Volatility January 1990 – June 2009 This graph shows the difference between price implied volatility (VIX index) and realized market volatility (1 month annualized).

  6. Our View on Volatility • Market volatility tends to revert to a mean level • Market volatility will trade in regimes: mean levels shift over time • On average, Price-Implied volatility will trade higher than realized market volatility: • This relationship not constant nor dependent on absolute level of market volatility. • This relationship provides our opportunity: • Normal spread vs. changes in spread; • Our strategy seeks to exploit these differences.

  7. The Relationship between Implied Volatility & Price S&P 500 vs. VIX Source: Chicago Board Options Exchange

  8. Which Markets Do We Trade? • The C.V.M.P. will trade options on the US and global equity indicies and US fixed income markets. These markets are ideal due to: • Moderate levels of volatility • Consistent and liquid option markets: • Large daily volume – market makers who can accommodate institutional sized trades; • Narrow bid/ask spreads; • Good liquidity in various market conditions; • CFTC, exchange traded instruments.

  9. Which Markets Do We Trade? • S&P 500 • Nasdaq • EuroStoxx • DAX • CAC • US 30 year Treasury Bond • US 10 year Treasury Note • Nikkei • Topix • Financial markets with options that consistently trade with implied volatilities above realized market volatility: 9

  10. How We Capture Alpha • Profit from the “natural structure” of options pricing • Differences between actual volatility and price implied volatility • Actual Volatility = Underlying price movements • Price Implied Volatility = Underlying price movements + risk premium • Forward Actual Volatility is unknown, therefore, market makers require a risk premium in order to manage their risk • We are “long” Actual Market Volatility • We are “short” Price Implied Volatility • We sell the steepest segment of premium decay

  11. Strategic Profile • Crespi constructs a portfolio of options designed to exploit the differential in price implied volatility and market realized volatility. • There are two components to the portfolio: • Long position in “actual” market volatility: • Establish long position through options or futures; • Result = long underlying market exposure • Long option positions can be used to help reduce portfolio risk • Short position in price implied volatility: • Establish short positions using in-the-money, at-the-money & out-of-the-money call and put options; • Result = short underlying market exposure • Portfolio is designed to be neutral to underlying market price movement: market exposure of two components will initially offset each other (delta neutral).

  12. Strategic Profile • Portfolio is designed to profit from the spread • Portfolio is designed to be neutral to underlying market price movement: • The market exposure of two components will initially offset one other; • Net market exposure of the portfolio will change with underlying market price movement; • Risk management is focused on managing underlying market exposure over time: • Position and exposure limits; • Position adjustment to re-set market exposures as needed. • Portfolio profits from: • Net decay of all option positions; • Portfolio may also profit from modest movement in underlying market: optimal markets = choppy, directionless price movements.

  13. When it Works When it Doesn’t When it Works…When it Doesn’t • Profits when markets trade within normal ranges, up, down, or sideways • Profits when spread between implied and realized volatility are wide • Profits during measurable rebounds in the market, up or down • Profits in broad spectrum of monthly high-low trading ranges • When the markets experience extreme market movements in very short period of time • When markets trend very strongly and implied volatility collapses

  14. Crespi Capital Advisors Our sole focus is managing volatility-based strategies. We seek to maximize portfolio returns while maintaining stringent risk controls. We are experienced volatility managers.

  15. Crespi Capital Advisors Experience is the Key Todd Miller, CFA 18 years managing volatility-based strategies. • Created strategy at TSA Capital Management (1991-1994) • Former partner in First Quadrant, L.P. (1995-2008) • Managed up to $10 billion in similar option-based strategy • Managed over $10 billion in other option-based hedge strategies • Experienced in trading domestic & global equity, fixed income, foreign exchange and commodity derivatives markets.

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