Power Tools for Hedge Funds: Leveraged and Inverse ETFs Direxion FOR INSTITUTIONAL USE ONLY

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1 Power Tools for Hedge Funds: Leveraged and Inverse ETFs

2 The Case for ETFs in Hedge Fund Portfolios Exchange traded funds have exploded in popularity among institutional investors in recent years, amassing nearly $3 trillion in assets under management. Because they are particularly suited for active trading strategies, ETFs now account for between 25 and 30% of total market turnover on an average day. ETFs now trade at a rate two to four times that of individual stocks, indicating that more and more of the world s most active investors, including hedge funds, are employing these vehicles to gain market exposure. ETFs are ideally structured to support fast-moving tactical strategies, offering: Low-cost exposure to market sectors: ETFs frequently trade at narrower spreads than the asset classes they represent, providing immediate, diversified exposure to markets, sectors and real assets at a fraction of the cost of the underlying assets. Liquidity: ETFs offer continuous liquidity even in hard-to-access markets like precious metals and restricted currencies. Even when markets close, as Greece did in 2015 or Egypt in 2011, the ETFs that track them continually provide liquidity and pricing information. Trading flexibility: ETFs can be bought and sold 24/7, without restriction, and can be hedged or leveraged to amplify returns. The Big Picture on ETFs, by Deborah Furman, Investments & Pensions Europe, May Here s How ETF Traders Rode Out Post-Brexit Stock-Market Rout June 30, 2016, MarketWatch. heres-how-etf-traders-rode-out-post-brexit-stock-market-rout

3 The Rise of Leveraged and Inverse ETFs Leveraged and inverse ETFs offer potentially more powerful capabilities to hedge fund managers. Leveraged ETFs are designed to generate up to three times the daily return of the index they track. Inverse ETFs achieve up to three times the inverse of their benchmark index. These ETFs can magnify the impact of your active, tactical positions, achieving similar performance results with a third of the capital outlay. The same is true on the short side, where leveraged inverse ETFs can potentially hedge risks with minimal capital outlay. Direxion leads the market in offering 3x and 2x leveraged ETFs, offering both long and short exposure to a broad variety of asset classes. Read on to find more about how these powerful portfolio management tools can help you achieve your objectives. 2.

4 Six Reasons Direxion ETFs Were Made for Hedge Funds Direxion Shares Leveraged Exchange-Traded Funds (ETFs) are daily funds that provide 300% or 200% leverage and the ability for investors to navigate changing markets with long and short flexibility. They offer hedge funds compelling benefits, including: A vehicle for active, short-term out-performance: Direxion ETFs seek daily investment results, making them ideal vehicles for short-term tactical positions.* Amplified results: Direxion ETFs leverage daily results by three or two times, enabling fund managers to multiply the impact of the trading strategies they pursue. Flexible capabilities: Direxion ETFs, with a range of objectives from 300% positive leverage to 300% inverse leverage, enable hedge fund investors to fine-tune long, short and paired exposure across a broad spectrum of assets. Hedged risk and down market performance: 300% and 200% inverse ETFs enable capital-efficient hedging of positions and can generate positive returns when markets fall in price. Liquidity in otherwise illiquid markets: Direxion ETFs enable investors to trade in and out of less accessible market sectors like emerging markets equity, real estate and commodities with minimal cost. Precise exposure: Targeted Direxion ETFs provide access to narrowly defined sectors, including countries, cap sizes, investment style and industry. * Investors who choose to hold a fund for periods longer than one day should recognize that their holding period is not in line with the fund s objective and such investors should regularly monitor and adjust their position to harness the daily objectives. 3.

5 Leveraged ETFs Magnify Results Direxion offers an innovative menu of leveraged strategies that can support hedge fund trading strategies. Direxion Shares Leveraged ETFs magnify exposure to daily returns by a factor of three or two. That is, every dollar invested provides $3 or $2 of exposure to the performance of the benchmark, which also means 300% or 200% of the risk and volatility. The funds seek to magnify the returns of their benchmarks on a daily basis; returns for longer periods are a product of the compounded daily leveraged returns during the period. Three times leverage enables investors to achieve the same market exposure with one-third the capital. For instance, say that after a sharp one-day downturn in technology stocks, a fund manager expecting a short-term rebound wanted to allocate 10% of his $100 million portfolio to the sector, or $10 million. By using a three-times leveraged technology ETF, however, the manager could achieve nearly the same return impact by allocating only $3,333,333. Inverse ETFs Hedge Risk and Offer Down Market Performance Inverse ETFs offer the same capital-efficient impact but in the opposite direction of market performance. Three- and two-times inverse ETFs enable cost-efficient hedging, with only one-third or half the capital commitment of unleveraged hedging. They can also enable managers to generate positive returns when markets turn negative. ETF BASICS An ETF is an investment vehicle that invests in a basket of securities and/ or derivatives in order to track an index. ETFs are priced throughout the day, like individual securities. 4.

6 Composition and Exposure of Direxion ETFs To obtain the necessary exposure, Direxion will invest all or a portion of their net assets in derivatives typically swaps or futures. These derivatives are agreements that provide the ability to gain exposure to respective indexes and sectors without the need for full dollar-for-dollar investment. The Bull ETFs will generate between 10% and 100% of their requisite exposure level from equities and the remainder from derivatives. The Bear ETFs generate their entire -100% or -300% exposure through derivatives. Risks and Suitability Direxion ETFs are intended for use only by sophisticated investors who: understand and accept the potential for substantial losses in short periods of time understand the unique nature and performance characteristics of funds that seek leveraged daily investment results have time to manage positions frequently to respond to changing market conditions Daily Versus Cumulative Returns Direxion s leveraged and inverse ETFs seek daily goals, which means that the returns for periods longer than a single day should not be expected to be an exact multiple of the underlying index (due to compounding). The cumulative returns could be different in trending or volatile markets. The chart below illustrates how volatility can affect performance over longer holding periods. More Is Not Always Better For the period of mid-december 2008 through mid-april 2009, the Russell 1000 Technology Index, the benchmark for the Direxion Daily Technology 3x Bull (TECL) and Bear (TECS) funds, experienced higher volatility, which affected the funds returns. Volatility in these graphic examples is a statistical measure of the dispersion of returns for the above market index. Generally, the higher the volatility, the riskier the security and the higher risk to investment. Source: Bloomberg As of 06/29/12 the index for funds was changed to the S&P Technology Select Sector Index. Rafferty has voluntarily agreed to waive all or a portion of its management fee and/or reimburse the funds for other expense through September 1, 2017 to the extent the Net Annual Operating Expenses exceed.95%. Past performance is not indicative of future results. 5.

7 Case Studies: Using Direxion Leveraged and Inverse ETFs Case Study #1: Hedging Duration Risk with Direxion Daily 20+ Year Treasury Bear 3x Shares As yields on government bonds worldwide turn low or even negative, investors have been reaching out onto the yield curve to buy longer and longer bonds and taking on unprecedented levels of duration risk. A one-hundred basis point rise in U.S. interest rates could trigger double-digit losses in 30-year Treasuries and high single-digit drops in 10- and 5-year Treasuries (see chart below). 5 Year US Treasury Current Yield = Yield Increase New Price Return 1% $ % 2% $ % 3% $ % Source: Direxion 10 Year US Treasury Current Yield = Yield Increase New Price Return 1% $ % 2% $ % 3% $ % 30 Year US Treasury Current Yield = Yield Increase New Price Return 1% $ % 2% $ % 3% $ % Fund managers can potentially protect against rising interest rates with Direxion s Daily 20+ Year Treasury Bear 3x Shares (TMV). A 5% allocation to this triple inverse fixed income ETF can reduce portfolio duration by half or more, as the table below shows. Source: Direxion 6.

8 Case Study #2: Playing Brexit Turmoil with Daily European Bull 3x Shares On June 24, 2016, UK voters unleashed volatility on European markets with their unexpected vote to leave the European Union. Stocks tumbled on that day and the day after, across Europe. However, for investors who thought the market was oversold, those two days represented opportunity and the Direxion Daily European Bull 3x Shares (EURL) offered a powerful tool to realize gains. Investors who bought EURL on the day that the leave vote was announced and held it for one week would have realized a 12% gain over five trading days. Those who waited until the market bottomed on the following Monday would have done even better, gaining 23% over a four-day period. Case Study #3: Capitalizing on Russian Instability with Daily Russia Bull 3x Shares In March 2014, military intervention in the Crimea triggered a sharp drop in Russian equities. By March 13, as tensions worsened and Russia made plans to annex the Crimea, Direxion Daily Russia Bull 3x Shares (RUSL) were down nearly 45%. Assets flooded into ETF over the next week, as investors sought to capitalize on a rebound, which in fact, occurred after Crimea voted to secede from Ukraine and join Russia. Investors who bought RUSL on March 13 and held to March 20 earned a return of 13% in a single week. Source: Bloomberg. Period Observed: February 24, March 30, 2014 The most successful traders were the most nimble, as markets continued to be volatile for the rest of the spring, as Russia moved to annex the Crimea, the U.S. and Europe levied sanctions and the continued instability began to take a toll on the Russian economy. Past performance is not indicative of future results. 7.

9 Case Study #4: Leveraged Exposure to Uncorrelated Asset Classes Another strategy pairs Direxion Daily S&P 500 Bull 3x Shares (SPXL) with Direxion Daily 20+ Year Treasury Bull 3x Shares (TMF) to provide diversification and capital-efficient market exposure. Since bonds are negatively correlated to stocks (and vice versa), a 50/50 mix hedges against downward movements in both asset classes and stocks, which is vital given the risks of bonds in a historically low interest rate environment after an eight year bull market. Because both ETFs are leveraged, investors can gain exposure for one-third the capital commitment. Over a holding period from December 31, 2015 to August 12, 2016 and rebalanced monthly, the trade has returned 31.44% with a maximum drawdown of 6.18% and volatility of 15.98%. Past performance is not indicative of future results. Source: Direxion 8.

10 Case Study #5: Double Shorting Paired Leveraged ETFs In range-bound volatile markets, sophisticated investors can deploy daily leveraged funds to position for possible negative portfolio returns. The strategy known as the double short gives investors the ability to short the bull and bear funds tracking a specific index. This strategy gives tactical investors a way to gain positive exposure to volatility while staying market neutral. In these examples, we have simulated the performance that would result from making an equal allocation to a short bull and bear fund with no rebalance over the time period. Periodic rebalancing would further enhance results. The top performing paired double shorts year-to-date, included the following: TOP 10 ETF PAIRS DESCRIPTION YTD DOUBLE SHORT RETURN (%) 30D CORR. (SP500) GASL/GASX Direxion Daily Natural Gas Related Bull & Bear 3x Shares LABU/LABD Direxion Daily S&P Biotech Bull & Bear 3x Shares GUSH/DRIP Direxion Daily S&P Oil & Gas Exp. & Prod. Bull & Bear 3x Shares YINN/YANG Direxion Daily FTSE China Bull & Bear 3x Shares NAIL/CLAW Direxion Daily Homebuilders & Supplies Bull & Bear 3x Shares DPST/WDRW Direxion Daily Regional Banks Bull & Bear 3x Shares DZK/DPK Direxion Daily Developed Markets Bull & Bear 3x Shares HAKK/HAKD Direxion Daily Cyber Security & IT Bull & Bear 2x Shares FAS/FAZ Direxion Daily Financial Bull & Bear 3x Shares PILL/PILS Direxion Daily Pharmaceutical & Medical Bull & Bear 2x Shares Source: Direxion. As of 8/31/16. The double short strategy entails a number of risks. Since the strategy depends on borrowing to short, an increase in rates would adversely impact performance. The holding period and frequency of rebalance as described above also impacts the performance of the strategy. Past performance is not indicative of future results. 9.

11 Power Tools for Hedge Funds: Direxion ETFs For hedge funds considering how to deploy leveraged ETFs to pursue their investment strategies, Direxion can be a powerful ally. Our firm draws on over 17 years of experience with highly liquid, tactical and strategic institutional-style ETFs. We provide a wide range of index-based products that offer directional options, magnified exposure and long-term, rules-based strategies to implement your investment and trading strategies. For more information about how Direxion ETFs can support your portfolio management strategies, contact us at Sylvia Jablonski Managing Director Capital Markets-Institutional Strategist jablonskis@direxioninvestments.com Brendan Cavanaugh Vice President Institutional ETF Strategist North East cavanaughb@direxioninvestments.com Aram Babikian Senior Vice President Institutional ETF Strategist West babikiana@direxioninvestments.com Matthew Bielski Senior Vice President Institutional ETF Strategist Mid Atlantic / South East bielskim@direxioninvestments.com Ryan Cvrkel Vice President Institutional ETF Strategist Mid West / Mid South cvrkelr@direxioninvestments.com.

12 STANDARDIZED PERFORMANCE AS OF 9/30/2016 Fund Fund Name 1-Mo. 3-Mo. YTD 1-Yr 3-Yr 5-Yr Gross/Net Since Inception Expense Incept. Date Ratios GASL Direxion Daily Natural Gas Related Bull 3x Shares NAV /13/ % 0.95% MKT /13/10 GASX Direxion Daily Natural Gas Related Bear 3x Shares NAV /1/ % 0.95% MKT /1/15 SPXL Direxion Daily S&P 500 Bull 3x Shares NAV /4/ % 0.95% MKT /4/08 SPXS Direxion Daily S&P 500 Bear 3x Shares NAV /4/ % 0.95% MKT /4/08 DZK Direxion Daily Developed Markets Bull 3x Shares NAV /16/ % 0.95% MKT /16/08 DPK Direxion Daily Developed Markets Bear 3x Shares NAV /16/ % 0.95% MKT /16/08 RUSL Direxion Daily Russia Bull 3x Shares NAV /24/ % 0.95% MKT /24/11 SOXL Direxion Daily Semiconductor Bull 3x Shares NAV /10/ % 0.95% MKT /10/10 SOXS Direxion Daily Semiconductor Bear 3x Shares NAV /10/ % 0.95% MKT /10/10 ERX Direxion Daily Energy Bull 3x Shares NAV /5/ % 0.95% MKT /5/08 ERY Direxion Daily Energy Bear 3x Shares NAV /5/ % 0.95% MKT /5/08 FAS Direxion Daily Financial Bull 3x Shares NAV /5/ % 0.95% MKT /5/08 FAZ Direxion Daily Financial Bear 3x Shares NAV /5/ % 0.95% MKT /5/08 TECL Direxion Daily Technology Bull 3x Shares NAV /16/ % 0.95% MKT /16/08 TECS Direxion Daily Technology Bear 3x Shares NAV /16/ % 0.95% MKT /16/08 TMF Direxion Daily 20+ Year Treasury Bull 3x Shares NAV /15/ % 0.95% MKT /15/09 TMV Direxion Daily 20+ Year Treasury Bear 3x Shares NAV /15/ % 0.89% MKT /15/09 GUSH Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3x Shares NAV /27/ % 0.95% MKT /27/15 DRIP Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares NAV /27/ % 0.95% MKT /27/15 NAIL Direxion Daily Homebuilders & Supplies 3x Bull Shares NAV /18/ % 0.95% MKT /18/15 CLAW Direxion Daily Homebuilders & Supplies 3x Bear Shares NAV /18/ % 0.95% MKT /18/15 DPST Direxion Daily Regional Banks Bull 3x Shares NAV /18/ % 0.95% MKT /18/15 WDRW Direxion Daily Regional Banks Bear 3x Shares NAV /18/ % 0.95% MKT /18/15 HAKK Direxion Daily Cyber Security & IT Bull 2x Shares NAV /15/ % 0.80% MKT /15/15 HAKD Direxion Daily Cyber Security & IT Bear 2x Shares NAV /15/ % 0.80% MKT /15/15 The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com. Short-term performance, in particular, is not a good indication of the fund s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund s prospectus..

13 DISCLOSURES: An investor should consider the investment objectives, risks, charges, and expenses of Direxion Shares carefully before investing. The prospectus and summary prospectus contain this and other information about Direxion Shares. To obtain a prospectus or summary prospectus please visit direxioninvestments.com/regulatory-documents. The prospectus and summary prospectus should be read carefully before investing. There is no guarantee that the funds will achieve their objectives. The Leveraged and Inverse ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investments. Investing in the Funds may be more volatile than investing in broadly diversified funds. The use of leverage by a fund means the Funds are riskier than alternatives which do not use leverage. Risks: An investment in the Funds involves risk, including the possible loss of principal. The Funds are non-diversified and include risks associated with concentration risk that results from the Funds investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts, forward contracts, options and swaps are subject to market risks that may cause their price to fluctuate over time. The Funds do not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. For other risks including correlation, leverage, compounding, market volatility, shorting for the bear funds, and specific risks regarding each sector, please read the prospectus. All indexes are the exclusive property of each respective company noted above and are licensed for use by Direxion Shares. These funds are not sponsored, endorsed, sold or promoted by the index providers and no representation regarding the advisability of investing in the funds is made by the providers. All rights reserved. Indexes are unmanaged and cannot be invested in directly. Distributor: Foreside Fund Services, LLC..