1. Prepared by George G. Namur, Ph.D.
January 2017
Dual Strategy
Equity Derivatives Fund
2. Confidentiality
Dual Strategy Equity Derivatives Fund2
This information is privileged and confidential.This
presentation includes descriptions of methodologies and
concepts derived through substantial research and
development efforts. No part of this presentation may be
reproduced by any means or transmitted without the written
permission of Dr George G. Namur.
3. Dual Strategy Equity Derivatives Fund3
Introduction
Fund Overview
Strategy Overview
Highlights of Prospective Organization
Dual Strategy Structure and Performance
EquityValuation
Bios
Contact Information
Appendix
Overview
5. Introduction
Dual Strategy Equity Derivatives Fund5
The fund is looking to raise capital in exchange for equity in the
NewCo
Prospective funding General Partners (GPs) will receive shares in the
Investment Manager Company and the Investment Advisor Company
GPs will jointly receive the performance and net management fees
that the fund generates
Required funds are part seed capital and part operation expenses
(OpEx) capital
7. Fund Objective
Dual Strategy Equity Derivatives Fund7
Achieve superior risk-adjusted returns using equity derivatives and
quantitative models
Keep correlation with market and volatility in check through
diversification and proper strategy allocation
Fund is targeting an annual performance of approximately 30% before
management and performance fees, with a volatility in the mid-teens
and a Sharpe ratio of approximately 2
8. The Fund in a Snapshot
Dual Strategy Equity Derivatives Fund8
The FCA-regulated London based fund will combine two complementary
strategies to generate high returns while limiting volatility
Long-Biased Options
Strategy
QuantitativeVolatility
Strategy
Equity options primarily The strategy serves to de-risk
the options strategy
• The two strategies are loosely correlated (correlation of 0.115)*
• The combination features a barbell strategy where more weight is allocated to
the lower risk strategy
* Monthly returns from Jan 2012 to Dec 2016 were used in computations
9. Portfolio Construction
Dual Strategy Equity Derivatives Fund9
The portfolio allocates funds between the options strategy and the
quantitative volatility strategy.The actual asset allocation is at the
fund manager’s discretion and is a function of market conditions
The options strategy focuses on long positions in US equity options
and capitalizes on their inherent asymmetric exposure and
magnified returns
The quantitative volatility strategy focuses on major US index
derivatives and is non-directional. It identifies and executes
arbitrage, relative value, and carry trades
10. Theoretical Portfolio Allocation
Dual Strategy Equity Derivatives Fund10
Options Strategy
QuantitativeVolatility
Strategy
Up Markets
Theoretical Allocation
(20-80)
• Relatively higher allocation
• Higher returns (leverage effect)
• Asymmetric exposure
• Likely to outperform
• Serves to reduce fund’s volatility
• Performance loosely correlated
with market
Sideways or
Down Markets
Theoretical Allocation
(10-90)
• Opportunities for bearish positions
• Using spreads rather than outright
positions may be appropriate
• Relatively higher allocation
• Investment opportunities
(arbitrage, relative value, carry
trade, etc.) unaffected by market
direction
• Likely to outperform
12. Options Strategy
Dual Strategy Equity Derivatives Fund12
The options strategy will follow a stereoscopic approach (top down
and bottom up), and will utilize a combination of global macro,
fundamental, technical, and sentiment analysis to identify high
potential trades
The strategy will primarily focus on long call options on US securities,
but will also enter bearish positions using long put options when
appropriate
The options portfolio will be diversified across stocks, sectors and
asset classes (via ETFs and futures) to mitigate security-specific and
correlation risk
13. Quantitative Volatility Strategy
Dual Strategy Equity Derivatives Fund13
The QuantitativeVolatility strategy uses the Gamma1 Vanna2 Volga3
(GVV) cost framework to accurately calculate the implied volatility for
options of all maturities
The GVV cost framework offers an innovative approach to
determining the true value of derivative contracts and identifies price
discrepancies between options of different maturities and underlying
securities
1. The Gamma of an option is the second derivative of the option value with respect to the underlying price
2. TheVanna of an option is the sensitivity of the option delta with respect to change in volatility; or alternatively, the sensitivity of Vega with respect to
the underlying price
3. TheVolga of an option is the second derivative of the option value with respect to the underlying’s implied volatility
15. Fund Structure
Dual Strategy Equity Derivatives Fund15
U.S. Feeder Fund Offshore Feeder Fund
Master Fund
InvestmentAdvisor
Company
General Partners
Capital GainsCapital Gains
Performance
Fees
Performance
Fees
Investment Manager
Company
Management
Fees
Management Fees
Net Expenses
16. Fee Structure
Dual Strategy Equity Derivatives Fund16
• Assets under management will be subject to an annual management fee
of 2%
• The fee will be charged on the first business day of every quarter on
the net assets under management as of the last business day of the
previous quarter
• Profits will be subject to an annual performance fee of 20%
• The fee will be charged on the first business day of every quarter on
the previous quarter profits in excess of the high-watermark, after the
management fees are deducted
18. Service Providers
Dual Strategy Equity Derivatives Fund18
Investment
Manager
Company
UBS London
(Prime Broker)
PwC London
(Auditor)
HSBC London
(Banker)
Dechert London
(Law Firm)
Citco London
(Administrator)
FCA
(Regulator)
20. Dual Strategy Equity Derivatives Fund20
Combination 1
(Low Allocation)
Combination 2
(Base Allocation)
Combination 3
(High Allocation)
Weight of Options Strategy 10% 15% 20%
Weight of QuantitativeVolatility
Strategy
90% 85% 80%
Best Month 10.04% 14.45% 18.86%
Worst Month -6.75% -7.14% -7.55%
CAGR 25.89% 29.65% 33.29%
Correlation with S&P 500 0.55 0.46 0.56
Standard Deviation 10.81% 14.46% 18.30%
Sharpe Ratio 2.20 1.88 1.68
Sortino Ratio 3.30 3.15 2.90
* Monthly returns from Jan 2012 to Dec 2016 were used in computations
Variations of Strategy Allocations
with Key Metrics
21. Dual Strategy Equity Derivatives Fund21
Up Months Down Months
Combination 1 (10-90) 0.42 0.16
Combination 2 (15-85) 0.42 0.15
Combination 3 (20-80) 0.41 0.15
* Monthly returns from Jan 2012 to Dec 2016 were used in computations
Correlation* of the Dual Strategy with
the S&P 500
25. London Office Budget Analysis
Dual Strategy Equity Derivatives Fund25
Expenditure Projection Annual Fees (USD)* -Year 1
One-TimeExpenses
Startup Costs $77,713
Office Fit Out / Furniture $85,714
Computer Hardware $73,571
Peripherals $7,857
Business Software / Applications $189,029
RecurringExpenses
Legal / Compliance $307,714
Office Space $416,667
Marketing $113,000
Miscellaneous $18,643
PayrollWages $1,435,714
Bonuses $56,316
Total $2,295,897
* Cost estimates are based on an exchange rate of 1.43 USD to the GBP
Year 1 2 3 4 5 6 7 8 9 10
Total Expenses
(Millions)
$2.30 $2.15 $3.41 $5.08 $8.03 $16.24 $21.38 $25.43 $29.86 $32.83
26. Equity Value – Base Allocation
Dual Strategy Equity Derivatives Fund26
• The mean value of equity computed by discounting the total fees
net of costs is around $260 million
• The required OpEx capital was calculated as $5 million by
taking the mean deficit of management fees over 10,000
iterations and adding three standard deviations of the mean
deficit
• Three standard deviations were added in order to minimize the
odds of being underfunded
27. Term Sheet Framework
Dual Strategy Equity Derivatives Fund27
A successful launch of this venture requires $5 million in OpEx capital
and a minimum of $50 million of assets under management (seed
capital).
Prospective investors must invest both seed and OpEx capital to become
GPs in the fund
An equity stake of 25% in return for $50 million seed investment
provides a funding GP with an IRR of around 35%
To keep GPs interests aligned with those of LPs, funding and sweat
equity GPs are expected to be meaningfully invested in the fund (AUM)
while the fund is operating
28. Term Sheet Framework
Dual Strategy Equity Derivatives Fund28
In return for the $5 million OpEx capital, a funding GP will
receive callable cumulative preferred shares at a preferred rate of
8% per annum, paid out quarterly
No bonuses will be paid to fund executives when the fund cannot
meet its dividend obligation on the outstanding preferred shares
The fund will buy back the preferred shares when capital is
available, hence insuring that GPs cover operating expenses in
proportion their equity stake
30. Dual Strategy Equity Derivatives Fund30
Professor of Finance at the Olayan School of Business at theAmerican University
of Beirut. Introduced several new finance classes including “Hedge Fund
Strategies”,“Derivative Securities” and “Securities Analysis &Trading”
Teaches CFA Level I, II, and III classes related to Fixed Income Portfolio
Management, Derivatives and Alternative Investment at the Institute for Financial
Analysts (IFA)
Two decade experience trading various markets (currencies, equities, fixed
income and commodities). Stock picking skills based on stereoscopic analysis
In-depth expertise in derivatives and risk management
Affiliated with the Gerson Lehrman Group as an expert on commodities,
resources and financial services
Dr. George G. Namur
31. Dual Strategy Equity Derivatives Fund31
Previously CEO and Managing Partner atVermont Harding Management Ltd, an
alternative asset management firm based on systematic foreign exchange trading
He started Namur Capital Management in 2001, a wealth management and advisory
firm. He managed clients money as Separately Managed Accounts. He focused on
global macro trends and his trading was driven by his macro views, including
market risk appetite. He supplemented his fundamental analysis with technical,
cyclical as well as sentiment analysis
Formerly General Manager at ShellTrading (previously Coral Energy) in Houston,
managing energy-related assets worth several billion dollars. Introduced the
concept of front office risk management. Developed a portfolio of synthetic power
assets allowing the firm to become a major player in electricity trading
Dr. George G. Namur
32. Dual Strategy Equity Derivatives Fund32
Worked at the prestigious Capital Market Risk Advisors in NewYork where he
advisedWall Street firms, banks and asset managers on risk management and
derivative valuation. Experience at CMRA inculcated a risk-based discipline in
trading and asset management
Trained in derivatives at Chase Manhattan Bank, now JPMorgan Chase in NewYork
MBA in Analytical Finance and Business Economics from the University of Chicago
Booth School of Business, and Ph.D. in Civil Engineering from the University of
Michigan,Ann Arbor
Fluent in Arabic and French
Dr. George G. Namur
34. Dual Strategy Equity Derivatives Fund34
Senior equity derivatives trader for a major bank in NewYork
Joined the bank in 2000 and has been managing the risk on the S&P 500 index
options portfolio since 2004
Main responsibilities include market making, customer facilitation and proprietary
trading as well as overseeing risk on other derivative products
Helped develop volatility marking methodologies that analyze relative value
opportunities in secondary risks
MS in Financial Engineering degree from Columbia University and MBA in Finance
from the City University of NewYork
36. Dual Strategy Equity Derivatives Fund36
For further enquiries, please contact
George G. Namur, Ph.D.
george.namur@namurcapital.com
+1 (917) 421-9866
+961 (71) 100977
Contact Information
38. Valuation Model Key Assumptions
Dual Strategy Equity Derivatives Fund38
Simulated quarterly returns for each allocation over ten years
Ran 10,000 iterations
Returns were sampled from a normal distribution
The mean return was the dual strategy’s CAGR and the standard
deviation was its volatility
New investments in the fund were modeled as a function of
previous year’s return, fund vintage, andAUM size
Redemptions were taken as a fraction of starting AUM for each
period
39. Discount Rate Assumptions
Dual Strategy Equity Derivatives Fund39
The beta of each allocation was computed using historical log returns
The discount rate was obtained from CAPM and adjusted using the
hazard rate, which is the probability of the business failing in any given
year, or returning less than -5% in any given quarter
The hazard rate was computed as the weighted average of :
Mean market hazard rate for a hedge fund of 33%*, at 25%
Computed hazard rate, at 75%
* Source: FinancialTimes
