Once the type of risk is defined, then seek the best tool to help hedge that specific risk.

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2 an ironic conundrum for the timeless investment professional: avoid the risky investment and get fired for leaving money on the table; invest in the risky asset and get fired for losing money. Benjamin Valore Caplan, CIMA Managing Partner, SeniorAdviser Syntrinsic Investment Counsel, LLC Weekly Letter June 15 th,

3 Define the type of risk first. Dying too soon Living too long Headline Risk Legislative Risk Inflation risk Currency risk Market risk Business risk Once the type of risk is defined, then seek the best tool to help hedge that specific risk. 3

4 Diversification Long/Short Strategies Derivatives A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one investment on the overall portfolio performance. 4

5 Seeks a basket of low correlation assets to improve long term performance. This is the premise of what we now call Modern Portfolio Theory, first explored by Harry Markowitz s 1952 thesis. Source: Loosening Your Collar Study 5

6 Source: Investopedia Stocks Bonds 6

7 Bonds & Stocks Bonds & Stocks International 7

8 Bonds & Stocks, International & Domestic Bonds & Stocks, International & Domestic Commodities & Real Estate 8

9 Russell2000 RUT S&P 500 SPX US Bonds VBIIX Real Estate RDI Int'l Equities TCIEX Commodities GSG Bonds & Stocks, International & Domestic Commodities & Real Estate What comes next? 9

10 Hard assets Collectibles MLPs LPs Absolute Return Funds Life Settlements Short ETFs... Hedged Equity Diversification Long/Short Strategies Derivatives 10

11 Seeks a known correlation between assets to capitalize on inefficiencies and asset movement. Manager feels AAPL is overvalued And RIMM is positioned And RIMM is positioned to beat earnings 11

12 Short 100 shares Long 100 Shares 12

13 $100 Cash Short $30 Stock $30 Cash Long $130 Stock Long $130 Stock Short $30 Stock 13

14 S&P 130/30 Index S&P 500 Source Data: Standard & Poor s 130/30 Index Fund Pros More like traditional Mutual Funds Can exploit negative information about stocks Can expand diversification through long/short holdings Cons Can be significant costs running long /short portfolio Must pay dividends on shorts Can experience additional volatility 14

15 Diversification Long/Short Strategies Derivatives More specifically, Equity Options. Calls & Puts 15

16 Own the underlying equity Sell calls to generate premium which can offset losses in the underlying security Profit Loss 16

17 Pros Can generate additional income Can reduce some of the loss during a stocks decline Cons Limits a stocks upside beyond short call strike Stock could be called away Unlimited risk Buying put options on stocks act like insurance. S lli ll ti i j ti hl Selling call options in conjunction helps finance the insurance. 17

18 Profit Loss Pros Can significantly reduce volatility Can increase portfolio wealth over the long term Can offer higher potential return than a diversified portfolio Cons Can trail the broader market during strong bull markets Stock can potentially be called away Expenses could possibly be higher than an ETF or Indexed Mutual Fund 18

19 Hedge a basket of stock with a put option on the index. Assumes the basket and index move together. Using options in a set it and forget it manner to limit risk. I fit bl l if th d l i Is profitable only if the underlying appreciates in value. 19

20 Using options to both hedge risk and capitalize on movement. Can be profitable if the underlying is flat or appreciates. Source: Loosening Your Collar Study 20

21 5% Collar Strategy Buy and Hold 0% -5% -10% -15% -20% -25% -30% This chart is for illustrative purposes only. Model portfolio performance results have certain inherent limitations. Unlike an actual performance record, simulated trades do not represent actual trading. Also, since the trades may not have been actually executed, the results may have over or under compensated for the impact, if any, of certain market factors such as lack of liquidity, money flow, etc. Actual results may have been better or worsethanthe results portrayed. No representation isbeing made that any accountwill orlikely to achieve profitsor losses similar to those. Source: Lacerte Capital Advisers Source: Investopedia 21

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