Finlight Research - Market Perspectives - Jan 2016

Market Perspectives
January 2016
Jan. 8th, 2016
www.finlightresearch.com
The Sun Can't Shine Every Day

“The current global equity run, by contrast, is
based on the assumption that a bunch of
second-rate economists (but first-rate
bureaucrats) running monetary policy using
third-rate Gaussian models have our backs
covered. And get this: they are going to help
us with controlled demolition of our currencies
because . . . wait for it . . . inflation is good,
and they know exactly how much is optimal
because they are omnipotent.”
– David Collum
2
FinLight Research | www.finlightresearch.com

Executive Summary: Global Asset Allocation
US dollar strength, commodities weakness (specially crude oil) and
China’s ongoing economic woes have been the biggest stories of 2015.
China and the Fed will be the main drivers of 2016.
The combination of a stronger Dollar, weaker crude, pressures in
commodities markets, and lower global economic growth was grossly
underestimated. This combination is probably kicking us out of the
‘Goldilocks’ scenario of loose financial conditions, steady (although
unspectacular) growth and inflated asset prices.
market valuation (P/E) remained elevated, volatility increased, and
earnings declined
Fed is back to "tightening" mode, and the global manufacturing recession
continues.
We remain cautious on risky assets and expect lower asset returns and
higher volatility to make the essence of next year. More risk-off episodes
should be expected in 2016.
The new year has opened with Shanghai crashing 7% and global equity
markets selling off.
We reiterate our view that we are sailing a cyclical bull within a
secular bear. The current cyclical bull may go higher for longer. But,
rising volatility and stalling earnings growth may indicate we are in the
late stage of the cycle.
The perfect storm is building…
We summarize our views as follows
3

MACRO VIEW
The Good
US employment remains one of the big positive stories of the year
Consumer confidence improved in December
US consumer spending and income post solid gains in November.
US ISM non-manufacturing remained strong
The Bad
US corporate profits and durable goods data continue to disappoint.
Capacity utilization and industrial production data has been weakening
The Industrial complex remains in contraction, with the ISM Manufacturing Index below 50 for
the second month, the Caixin Manufacturing PMI at 48.2 and the necessary unwind of China’s
over-investment cycle
Existing home sales dropped 10.5% YoY, to 3.76 million units. This was the sharpest decline in
over five years.
The Ugly
Main systemic risk resides in China: The credit bubble is unsustainable. The Chinese debt
burden is extremely high (debt to GDP ratio is around 300%) and the credit cycle is probably
starting to turn. We are probably in the early stages of a bursting credit bubble.
We feel concerned about the credit market liquidity as turnover ratios are well below pre-
crisis levels and the bid-ask spreads are much wider.
4

5
The Big Four Economic Indicators
The current picture is characterized by relatively strong Employment and Income, a weak Industrial
Production (down in 9 of the last 12 months) and uncertain to weak Real Sales (down in 6 of the last
12 months).
The average of these indicators suggests that the economy is still trending sideways. But setting a new
high still seems possible over the short term.

6
Employment
Employment has been the big
positive story of 2015
Part-Time Workers for Economic
Reasons (expressed as a
percentage of the labor force) has
decreased by 0.6% (900K pers.)
over the last 10 months
Still, if current trend continues, we
would need about 2 years to
achieve full employment like in
1999 and 2007

7
Industrial Production
Both capacity utilization and industrial
production are heading south…
The Industrial complex remains in
contraction in US, like in China !

8
New Orders
New orders for durable goods have been moving sideways since 2012
Both ISM index for new orders and new export orders have fell in contraction territories.
Probable reasons behind this decline in new orders: US dollar strengthening, Emerging Markets
weaknesses and crude oil crunch

9
Consumer Confidence
Consumer confidence and small business sentiment (NFIB Small Business Optimism Index) have been
tracking each other since the last crisis.
But a notable divergence appeared 9 to 12 months ago…

10
GS – Global Leading Indicator (GLI)
The Dec. Final GLI came in at
1.4%yoy. Its MoM momentum
came at 0.12% (down from 0.13%
last month)
GLI is back again in Slowdown
phase.
Only three of the ten underlying
components of the GLI improved in
November.
We continue to think that the
acceleration we’ve been
witnessing since Jan. ‘15 is quite
modest for a typical expansion
phase

11
China’s Foreign Reserves
The fixed-income / credit edifice
is highly vulnerable to China’s
need to liquidate Treasury reserves
in order to maintain its currency
peg, as capital outflows increase
and market widely expects further
devaluation in the USD-CNY
China’s foreign exchange reserves
have been falling since end of 2014
(down $513 Bln over 2015)
In Dec ‘15, they fell 3% (to
$3.33Trn), the highest monthly
drop since 2003!
As capital outflows persist,
pressure on the PBC to let the
yuan depreciate further will
intensify…

12
China’s Renminbi
China is simply adjusting the yuan
forex in an attempt to bring it more
in line with offshore rate (trading in
HK)
The spread between the onshore
and offshore rates is at its
widest level in years.

13
EQUITY
We change nothing to our previous positioning.
We think that the equity bull market is aging, that market valuation is elevated, volatility is
heading up, and earnings are declining.
Stocks appear rich to corporate profits, when corporate profits themselves appear to be at extreme
levels as a share of GDP.
S&P 500 earnings have now declined for four straight quarters while revenues have declined for three
consecutive quarters
Stock market breadth doesn’t look healthy as most of the index performance is driven by very few
companies and masks broader weakness across the market. The break of the 2011 bull trend in the
Russell 2000 is another ugly medium-term signal for stocks.
Stock buybacks are at a record level but the stock buybacks engine seems exhausted. The S&P 500
buyback index has been underperforming the S&P 500 since Q3 2015.
Market strategists in top 14 investment banks seem overconfident. They see the S&P500 going up
in 2016 with an average return of 6.5%. No one see the market going down
Our main scenario from here (80% chance) : A massive top forming around 2135 :
US profit margins are showing increasing evidence of peaking. On Price/Sales metric, equities are
trading at the top of the historical range.
A resumption of earnings growth going into 2016 will be necessary for equities to move higher.
Credit market has entered its late-cycle stage
Recent data shows more evidence of lower productivity, lower potential GDP growth and (later)
higher inflation risk. This is a bad scenario for stocks

14
EQUITY
Our alternative scenario (20% chance) : The S&P500 breaks the 2135-2140 resistance, opening
the way to 2225.
Stocks seem more vulnerable than ever to any external choc (Central Banks action, China,
Crude oil…)
Bottom line :
De-risking should continue. A higher allocation to cash is sensible in this late-stage stock bull.
As expressed in our previous report, we moved tactically UW on equities as the S&P500
broke below the 2020 support. We will switch back to Neutral if the S&P 500 reintegrate its
2020-20140 range or reach the 1885-1903 zone.
We remain Neutral on Europe and Japan vs. US despite the policy divergence between the
Fed and the ECB/BoJ and continued improvement in corporate profitability and balance sheets in
Japan. According to the 12 month forward P/E, Europe is trading at 15 year highs, relative to
the US. Weak demand from China is expected to continue to weigh on Japan's production and
exporters in Eurozone.
We remain UW in US small caps vs large caps.
We remain UW EMs vs DMs, given the Fed hawkish stance and USD strengthening. Negative
spillovers from China will also likely have a strong impact on other EMs.

15
US Earnings
The S&P500 stands within an earnings
recession with -0.4% YoY in Q2 and -1.3%
YoY in Q3
FactSet's data shows a current forecast
of a 4.7% decline (YoY) for Q4-2015
earnings and a 3.2% decline in
revenues.
If this earnings decline becomes effective, it
will mark the first time the index has seen 3
consecutive quarters of year-over-year
declines since Q1/Q3-2009.
No earnings/revenue growth is
projected before Q1-2016
For Q4 2015, 85 companies have issued
negative EPS guidance and 26 companies
have issued positive EPS guidance

16
US Earnings
On top of that the S&P500 is
significantly over priced relative to
the currently falling forward 12 month
PE
The 12-month forward P/E ratio for the
S&P 500 now stands at 16.2, well above
historical averages: 5-year (14.3), 10-
year (14.2)

17
S&P500 – A Long-Term Perspective
Equity markets still appear at lofty valuations, whatever the valuation metric we use.
We see only a few quarters (during the dot.com bubble) with higher valuations
Valuation alone is very rarely a timing tool for a major market top
Nevertheless, all these indicators suggest a cautious long-term outlook and weak long-term return
expectations

18
S&P500 – A Medium-Term Perspective
Stock market breadth is hardly
healthy
The market is propped up by the
performance of a few stocks (most of
theme are Techs) that masks
broader weaknesses in smaller caps
An equally-weighted S&P500
underperforms the (cap-weighted)
S&P 500 by around 4% over the
year.

19
S&P500 – A Short-Term Perspective
Since mid-2015, the S&P500 index has
switched to defensive mode
Over 2015, low volatility portfolio (+5.1%
YoY) has outperformed the high beta
portfolio (-12.5% YoY).
This outperformance started during the
summer and accelerated at the end of the
year.

20
S&P500 – Tech (Long-Term) Perspective
Despite the last correction phase,
the uptrend on the S&P500 is not
damaged yet.
Given the long-term wave
count, the market will probably
turn up somewhere between
1900 and 1885, to enter a period
of range-bound trading.
Any break lower than 1885 would
open scope to a deeper correction
towards 1850, without invalidating
the uptrend
Only a material break lower
than 1850 would be able to
damage the current trend.
Below, things could get ugly for
the index.
?

21
S&P500 – A Short-Term Perspective
Our prop. Short-Term trading model has switched to substantially long on Jan. 8th S&P500
close (@1922.03) Is that a signal to “buy the dip”?
The drawdown entered on Aug 20th has been recovered.
The model targets 1941 – 1961 then 2041 – 2061. Its first stops stand at 1903 and 1865

22
S&P500 – Investors Sentiment
According to the weekly sentiment survey from the American Association of Individual Investors
(AAII), bullish sentiment reached its 5 month low
Source: Bespoke

23
FIXED INCOME & CREDIT
Fed has finally moved to hiking mode. But its securities portfolio has changed only modestly since
the end of QE
At this stage, the Fed refrains from reducing the amount of USTs ($2 462 Bln vs $1 758 Bln in MBS)
hold on its balance sheet and continues to replace the volume of maturing securities
The real test for bond markets would be the moment when:
Other Central Banks start getting away from QE-easing, putting all the rates on a upside track
The Fed decides (sooner or later) to replace the use of its "temporary" tools (reverse repo among
others) with the an outright reduction in its securities portfolio to reduce reserve balances.
We expect negative total returns on USTs. We still look for the bear market on USTs to resume.
We remain tactically Neutral on USTs as far as the 10-year yield stays below 2.35. We wait for a
material break either above 2.35 or below 2.00 to change our positioning
We think that the risk is still biased to the upside on yields. Our ultimate target on 10y yields stands
at 2.60 by H1-2016 and 2.75 by H2-2016
We keep our short duration position in 2y USTs
On German Bund, we remain Neutral. as long as the 10-year yield stays above the 0.40 – 0.45 area.
We will switch to UW again as the 10-year yield breaks above 0.85-0.90 or below 0.45
We expect US Treasuries to underperform relative to Bunds and JGBs

24
While we think the risk of high inflation is low, we expect an increase in the market pricing of long-term
inflation in the US. Inflationary signs should be watched closely as they will foreshadow a steepening
decline in Govies.
We remain Neutral HICP Inflation as we expect breakevens to trade sideways in the Eurozone
We remain OW on 10y-TIPS breakevens given their historically-low levels. While we see no
immediate catalyst for a move higher in breakevens, we view US 10y breakevens as structurally cheap
(1.6%) and having limited downside

25
We remain UW on corporate credit, due to valuation, to rising volatility, to position within the credit
cycle and given the weak total return forecast.
We expect volatility to stay elevated and think that an additional liquidity premium is needed to make
HY attractive
We still prefer IG over HY on a risk-adjusted basis as we expect volatility on spreads to remain
elevated and we believe IG corporates better positioned to absorb the impact of rising rates and bad
news from China.
More signs tend to show that the US credit market is already in the late-cycle stage. Credit quality
is deteriorating, but at a measured pace. Financing gap has turned strongly negative, making
corporates more and more dependent on external sources of liquidity.
But low cost of funding and continued investor demand have kept the asset class afloat…
Nevertheless, the current HY spreads are implying default rates consistent with a recessionary
environment
We expect the focus on liquidity to remain. As said in a previous report, we feel concerned about the
credit market liquidity as the rate of turnover in corporate bonds has steadily declined since 2009,
despite the huge inflows.
We do not think investors are getting paid enough to own less-liquid credits
We feel cautious about the significantly negative CDS-Cash basis, especially on HY, induced by
supply fears and the increasing use of CDS indices to get (through protection selling) exposed to
the credit market with a reasonable liquidity.

26
US High Yield is the only segment where we see some potential for spreads tightening. But we expect
this tightening to be more then offset by the rise in UST yields
European credit looks to be in a Goldilocks scenario. European growth is picking up but is not too
hot yet and default rates are expected to remain low (around 2% - 3% versus 5% in the US) over next
year
Nevertheless, we feel cautious about EUR HY despite the prospects of further easing by the ECB.
Next QE may drive a rally in European credit over the near term, but long positioning is getting
crowded, liquidity scarce and volatility higher. We see Euro HY trending wider over 2016.
Within the credit pocket, we remain Neutral on USD vs. EUR HY spreads, but we prefer USD on a
total return basis, despite its higher beta to energy sector. We position our credit portfolios into
higher quality names across sectors
We still prefer US IG over Eurozone.IG, as we think that more attractive spread valuations and
higher carry should fuel a stronger bid for US credit.
Bottom line : UW Govies, UW US vs Eurozone Govies, remain long flatteners on the US yield curve
and short duration in 2y USTs, UW credit, Neutral Eurozone vs US HY credit, UW Eurozone vs US IG
credit, OW 10y-TIPS and Neutral HICP Inflation, UW High Yield vs High Grade, Neutral on EM
sovereigns

27
Don’t Fear Rising Rates…
Rising rates imply two opposite
effects:
Immediate pain with MtM
losses over the short-term
Brighter future with better
reinvestment opportunities
over longer periods
A Pension Partners study shows
that the second effect more than
absorbs the first one.
Rational investors shouldn’t fear
rising rates, but a persistence of
the current low-yield environment

28
Inflation Expectation
EU and US long-term inflation expectations
have been underperforming
Despite the ECB continuous easing, we don’t
feel comfortable with being long EU inflation
We are more bullish on 5y5y inflation in US
as a cheap hedge for any positive surprise
over H1-2016

29
US High Yield
High Yield credit spreads are widening with repeated sharp spikes and increased contagion
across sectors
And this is not just about energy worries and commodity stress as HY spreads are widening across
all sectors of the economy, even those which benefit fundamentally from falling oil prices
We do not think that the sell-off is overdone. For us, it reflects higher liquidity / macro risks, large
outflows, and persistent price volatility
100+ Bps
spikes

30
US High Yield
Bank lending standards start to tighten
We should expect an increase in
defaults over the next 12 months (target
= 5% in US HY)

31
US vs Euro Credit
European credit looks to be in a Goldilocks scenario. European growth is picking up but is not too
hot yet and default rates are expected to remain low (around 2% - 3% versus 5% in the US) over next
year
The lack of energy companies in Euro HY remains the main contributor to the underperformance of US
HY vs Euro HY.
We still see Euro HY trending wider over 2016.
US High Yield is the only segment where we see some potential for spreads tightening. But we
expect this tightening to be more then offset by the rise in UST yields

32
Liquidity and Negative CDS Basis
CDS-Cash basis, especially on HY, is reaching very negative levels because of increasing use
of CDS indices by long-only investors to get (through protection selling) exposed to the credit
market with a better liquidity.
In exchange for this additional liquidity, investors are giving up some of the spread available on cash
markets
DTCC data shows that clients are holding record long (risk, so short protection) positions in CDX IG an
iTraxx Main

33
EXCHANGE RATES
The dollar rally is not over. We reiterate our bullish view on USD over the medium-term and expect a
rival of the appreciation cycle of the '90s
Historically, USD cycles have been persistent, lasting 5-6 years in the appreciation phase. We thus
see further medium term USD gains against the major crosses (especially EUR and JPY) and
expect a cyclical low in EUR/USD somewhere in H2-2016 (probably before the ECB tapering)
Besides the Fed’s hiking mode, US dollar continues to be supported by the fears of a global growth
recession
Despite the sharp correction of Dec. ‘15, we continue to think that the picture is still bullish as
long as the 98.3 support is preserved. Ultimate target ~ 102
The continued monetary divergence between the Fed and ECB, and the shallow growth outlook for
China, should lead to further downside in EURUSD throughout at least the first half of 2016.
Ultimate target ~ parity.
Our positioning on EUR-USD remains driven by (almost) the same trading rules:
We remain Neutral as far as the pair stays between 1.08 and 1.1088.
From here, we’ll move to UW again after a clean break below 1.08. Next target = 1.0440 and then
1.02-1.03
We will move to OW if the uptrend from March is reintegrated and/or there is a clean break above
the 1.1088 resistance

34
EXCHANGE RATES
We change nothing to our positioning on USD-JPY
On USD-JPY, we remain Neutral for the moment, as the spot failed to hold a break above 124-125
resistance.
We think the pair has already reached a peak in 2015 and is likely to see a downward trend
in 2016 (target ~115 – 113). Main reason for that: increasing current account surplus and
expected unwinds of foreign assets by Japanese investors.
We remain neutral as far as USD-JPY in the consolidation range (114-125). Below, we move
UW. Above, we switch to OW.
We remain UW EM and Commodity FX, given the Fed’s hiking stance and bad news coming from
China.

35
US Dollar Index
DXY index has been confined to a range since Mar. ‘15
After a range consolidation, and given the policy divergence between the Fed and other Central Banks,
we expect the US Dollar to move higher with a target at 102
We continue to think that the picture would remain clearly bullish as long as the 98.3 support is
preserved.
We’ll move to UW if the index breaks out of the range to the downside.
Between 98 and the bottom of the range (~93), we switch to Neutral
.

36
EUR-USD
The key level which the EUR-
USD must stay under is
1.1088. A close above would
likely lead to much more EUR
upside with even a squeeze
towards 1.17
Our main scenario : heading
down to 1.0440. The ultimate
target for this scenario would
be around the 1.02-1.03 level at
minimumb.
Breaking below 1.08 is needed
for confirmation

37
USD-JPY
As expected, and given the
lack of any bullish catalyst, the
USD-JPY continued to remain
weak
This weakness has concretized
with the pair breaking through the
ascending support at 120.50
We expect the first target at 118
to induce a limited correction
before the downtrend resumes
toward 114.

38
COMMODITY
In 2015, commodities experienced their worst losses since the Financial Crisis
The steady rise in the Dollar, slowdown in global growth and Chinese demand, and increased supply
all contributed to the third consecutive down year for commodities
Prospects for commodities are still looking shaky:
China’s investment slowdown poses a clear downside risk for commodity prices
US dollar strengthening is expected to persist over the coming 6 months, weighing on commos
The tightening cycle has started in the US. Higher rates are usually bearish for commos as they
put a higher cost on carrying them in inventories
The downtrend in commodities looks about to bottom out. But the prospects for a rapid recovery are
very slim. In previous cycles, oil and copper have spent a much longer time trading at depressed
levels
We don’t see any sustainable recovery without a pick-up in global growth or a substantial
shrinkage in supply
Over 6 to 12 months, return forecasts are negative for commodities as a whole. We remain neutral-
to-underweight commodities overall .
From a longer-term perspective, owning commodities makes sense in an asset allocation because of
their structural low correlations to other assets and strong inflation hedging abilities,

39
COMMODITY
Bottom Line :
Energy: Rough year for the energy markets in 2015!
Fundamentals still indicate downward pressure on crude prices. High levels of global inventories
and a continuation of output from OPEC, Russia and the United States continues to weigh on price
The world oil market is estimated to be oversupplied by 1.5M B/d, yet Saudi Arabia and OPEC
keep pumping…
Crude oil is now at a level where it is likely to test 2008 lows of $32.48 per barrel. Below there,
things could get ugly for the price of oil.
Following our positioning rule, we moved from Neutral to UW as the spot breached the August
low (~38), with targets at 35 (already reached), and 28-30
From here, we keep exactly the same tactical rules:
Move to OW within the bottoming zone of 29-25
Move back to Neutral if the spot breaks above 38
Move to OW above 42 and trade the 42-52 range
Go Neutral again if the WTI goes above 56.5
Go OW if the it breaks above 63

40
COMMODITY
Precious Metals:
Outlook for precious metals continues to be dominated by the potential timing and pace of Fed’s rate
hikes and the subsequent impacts on US dollar, real yields and commodity prices.
The main factors suppressing gold / silver prices in the near term are: higher US real yields, stronger
USD, outflows from gold ETPs and weaker gold flows to Asia.
We believe prices will likely trough in mid-2016 as these factors begin to fade.
In the meanwhile, gold / silver are still due for a final leg down. Our ultimate target remains at 980-
1000 on gold and 12.5 on silver.
In December, a rebound occurred close to our “accumulation zone” at 1050 on gold.
During the month, we switched from Neutral to OW as the spot broke below 1070, and again to Neutral
after the rebound.
Our positioning rules remain unchanged:
Neutral between 1120 and 1070.
OW below and above.
We will wait for 1050 to progressively start accumulating Gold.

41
COMMODITY
Base Metals:
Base metals are the second worst performing commodity sector of 2015. China and deflationary
pressures caused industrial metals to lose almost 25% of their value
But lower prices are still needed to oblige producers to cut production and to rebalance
oversupplied markets.
The main reasons (growth disappointments in China and broader EM) behind the bear trend we’ve seen
since 2011 are still alive… The developments surrounding Chinese economy will continue to dictate
prices in 2016
We remain Neutral on base metals, but continue to avoid holding Copper and Iron ore
Agriculture: GSCI Agri was down -2.8% in December, ending 2015 at -12.9% YoY.
Grain prices continued lower in Q4 and 2015 ended with losses across the board : -15% for Soybeans,
-10% for Corn, -20% for Wheat
We continue to believe in a limited downside to grain prices from here when upside seems very
interesting (on medium-term).
Weather issues linked to El Nino could induce huge price volatility over coming months.
We expect perfect growing conditions to be hurt in the coming months. For Soybeans, the
Brazilian production seems to be hit harder than expected from the recent heat and dryness. But, on the
other hand, forecasts for the wheat crop in Argentina were recently revised twice to the upside
At this stage, we choose to remain Neutral because of excess supply.

42
Crude Oil
Although rig counts in the US
have fallen to to 536 on Dec 31st,
2015 (from its peak at 1609), U.S.
production remained steady.
We currently stand at or close to
all-time storage capacity utilization
in the US
Rigs Count

43
Crude Oil
Gross shorts continue to rise
and are close to all-time highs.
Similar levels were reached in
Mar. ‘15 and followed by a short
squeeze that sent oil prices 30%
higher.
Crude futures structure has
shifted to contango (as a sign of
ample supply) since end of 2014
The cost of storing oil has
increased because of cash &
carry trades: buying nearby oil,
putting it in storage and financing,
and making profit as far as the
total financing costs stay below
the contango.
Source: Barclays

44
Crude – Tech. (Long-Term) Perspective
For oil, we have had nothing
but bad news from both the
supply and demand side over
2015.
The WTI has broken the trend
across the lows since Dec
’98, and the important support
at 41.6
Next step would be to break
below the lows of 2008
(32.4) and slide to the 28-29
area.
In our view, this area is the
start of the bottoming zone,
with the lower end of the zone
around 25.

45
Crude – Tech. (Medium-term) Perspective
Last month, we moved to
Neutral as the WTI broke below
42.
And according to our
positioning rule, we moved
during December to UW
when the spot breached the
August low (~38). Targets : 35
(already reached), then 28-30
From here, we keep exactly the
same strategy :
Move to OW within the
bottoming zone of 29-25
Move back to Neutral if the
spot breaks above 38
Move to OW above 42 and
trade the 42-52 range
Go Neutral again if the
WTI goes above 56.5
Go OW if the it breaks
above 63

46
Copper
For Copper, like for most other
commodities, a large supply
adjustment is required in order to
restore a better balance to the physical
market
… And for that, prices need to go
lower on the cash cost curve
Despite our neutral stance on industrial
metals, we’ve avoided holding Copper
and we’ve proved to be right
This time, we think that $ 4000/t (90th
percentile) is probably the level we
should reach before any price
stabilization becomes possible
.

47
Iron Ore
Iron Ore is probably the
commodity that suffered the most
from China’s investment
slowdown
China’s real estate fixed asset
investment continuous plunge
still poses downside risk for
Iron Ore
Keep away from Iron Ore!

48
ALTERNATIVE STRATEGIES
The HFRI Fund Weighted Composite Index posted a decline of -0.85% (-0.85% YTD) in
December, concluding the fourth calendar year decline in hedge fund performance since 1990.
Losses were led by CTAs (-2.35% MoM) and Energy/Basic Materials (-2.36% MoM)
The HFRI Equity Market Neutral Index led Equity Hedge strategies in December with a gain of +0.7%
Among Relative Value strategies, Volatility Arbitrage is the only strategy with positive performance in
December: +0.5% (+7.0% YoY)
Global Macro/Discretionary strategy was flat over 2015
We stick to our preference for risk diversifiers (pure alpha generation strategies) over return
enhancers. Our choice has been rewarding on Market Neutral Equity (+5.0% YoY) and Volatility
Arbitrage (+7.0% YoY), but mixed on Global Macro (-0.1% YoY) and CTAs (-2.3% YoY)
We believe that diversifying portfolios with an increased allocation to alternatives is particularly
attractive at this stage of the cycle, given the current macroeconomic and interest rate uncertainties
We think that the widening gap between the Fed and ECB monetary policies (and its subsequent
impacts on US dollar, commodities and Govies) is supportive for CTAs and Global Macros on which
we remain overweight

49
ALTERNATIVE STRATEGIES
We are not changing our recommendations on alternatives which we consider to be suited to current
market conditions. We maintain our OW positioning on:
Equity Market Neutrals both for their “intelligent” beta and their alpha contribution.
CTA’s and Global Macro as a diversifier and tail hedge. These strategies should outperform as
FX and commodity current trends are likely to persist.
Vol. Arb strategy and prefer funds that trade volatility globally (all assets / all regions). This is our
way to take advantage from the higher volatility regime.

Bottom Line: Global Asset Allocation
US dollar strength, commodities weakness (specially crude oil) and
China’s ongoing economic woes have been the biggest stories of 2015.
China and the Fed will be the main drivers of 2016.
The combination of a stronger Dollar, weaker crude, pressures in
commodities markets, and lower global economic growth was grossly
underestimated. This combination is probably kicking us out of the
‘Goldilocks’ scenario of loose financial conditions, steady (although
unspectacular) growth and inflated asset prices.
market valuation (P/E) remained elevated, volatility increased, and
earnings declined
Fed is back to "tightening" mode, and the global manufacturing recession
continues.
We remain cautious on risky assets and expect lower asset returns and
higher volatility to make the essence of next year. More risk-off episodes
should be expected in 2016.
The new year has opened with Shanghai crashing 7% and global equity
markets selling off.
We reiterate our view that we are sailing a cyclical bull within a
secular bear. The current cyclical bull may go higher for longer. But,
rising volatility and stalling earnings growth may indicate we are in the
late stage of the cycle.
We summarize our views as follows
50

51
Disclaimer
This writing is for informational purposes only and does not constitute an
offer to sell, a solicitation to buy, or a recommendation regarding any
securities transaction, or as an offer to provide advisory or other services
by FinLight Research in any jurisdiction in which such offer, solicitation,
purchase or sale would be unlawful under the securities laws of such
jurisdiction. The information contained in this writing should not be
construed as financial or investment advice on any subject matter.
FinLight Research expressly disclaims all liability in respect to actions
taken based on any or all of the information on this writing.

About Us…
FinLight Research is a research-centric company focused on Asset Allocation from a top-down
perspective, on Portfolio Construction, and all related quantitative aspects and risk management issues.
Our expertise expands along 3 axes:
Asset Allocation with risk control and/or risk budgeting techniques
Allocation to alternative investments : Hedge funds, rule-based strategies (momentum, value,
carry, volatility), real assets (real estate, infrastructure, farmland, timberland and natural resources).
Private equity and venture capital should be the next step…
Allocation with a factorial approach built on the understanding (profiling) of the risk/return drivers of
the different asset classes
FinLight Research is an innovation-oriented company. We target to fill the gap between the
academic research and the investment community, especially on real assets and alternatives. We survey
on a continuous basis the academic literature for interesting published and working papers related to
quantitative investing, non-linear profiling, asset allocation, real assets...
52

Our Standard Offer
Provide tailor-
made quantitative
analysis of your
portfolios in terms
of asset allocation,
risk profiling and
risk contribution
Provide tailor-
made quantitative
analysis of your
portfolios in terms
of asset allocation,
risk profiling and
risk contribution
•Risk Profiling
Offer a turnkey 3-
step factor-based
process in GAA
with factor
selection, risk
budgeting and
dynamic portfolio
protection
Offer a turnkey 3-
step factor-based
process in GAA
with factor
selection, risk
budgeting and
dynamic portfolio
protection
•Factor-based GAA Process
Provide assistance
with alternative
investments
(including real
assets) in terms of
profiling, and
integration in a
GAA
Provide assistance
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investments
(including real
assets) in terms of
profiling, and
integration in a
GAA
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and/or risk
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•Global Asset Allocation
(GAA)
53

Finlight Research - Market Perspectives - Jan 2016

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