TACTICAL ASSET CLASS ROTATION MODEL DARIUS DALE: MACRO TEAM

TACTICAL ASSET CLASS ROTATION MODEL DARIUS DALE: MACRO TEAM MARCH 12, 2015

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HARNESS THE POWER OF A MULTI-FACTOR, MULTI-DURATION VIEW. OUR VOLATILITY-ADJUSTED MULTI-DURATION MOMENTUM INDICATOR (VAMDMI) METRIC IS THE KEY DIFFERENTIATOR BETWEEN TACRM AND OTHER QUANTITATIVE RISK MANAGEMENT TOOLS. SPECIFICALLY, THIS CALCULATION OF MOMENTUM COMBINES MULTIPLE FACTORS ACROSS MULTIPLE DURATIONS AND DISPLAYS THE OUTPUT IN A MANNER THAT IS BOTH INTUITIVE AND EASY TO INTERPRET. Multi-Factor Price, Volume and Volatility: TACRM uses volume-weighted average price (VWAP) data rather than single factor price data to infer the market s conviction in a directional trend (or lack thereof). Multi-Duration Short-term (1-3 months), Intermediate-term (3-6 months) and Long-term (6-12 months): TACRM applies a volatility overlay to account for the existence of developing and/or trending fundamental narratives. Specifically, if crossasset volatility* is rising on a trending basis, TACRM records observations in the smaller of the two sample sizes (across each duration) and, conversely, if cross-asset volatility* is falling on a trending basis, TACRM records observations in the larger of the two sample sizes (across each duration). Intuitive Z-Scores: For every liquid factor exposure in the world (roughly 200 in aggregate), TACRM computes a standalone Z-Score for each of the three aforementioned observation periods. The baseline assumption is that deviations from the mean in each sample of VWAP data represents the existence of positive or negative momentum. Specifically, a positive value on a specified date indicates that the associated price is n-standard deviations greater than the mean of the sample of observations in its respective trailing n-month period. Easy To Interpret Standardization: For each date in the model, TACRM computes a simple average of the three aforementioned Z-Scores for each factor exposure. This composite Z-Score is the VAMDMI metric that TACRM analyzes in various manners to produce actionable risk management signals. Moreover, because TACRM s VAMDMI metric uses a Z- Score methodology to transform VWAP data, it s signals are agnostic to an individual factor exposure s historical beta and volatility thus effectively normalizing the degree to which investors in different asset classes are observing momentum. *BANK OF AMERICA/MERRILL LYNCH GLOBAL FINANCIAL STRESS INDEX HEDGEYE 3

NEVER AGAIN MAKE AN UNINFORMED RISK MANAGEMENT DECISION. HEDGEYE 4

FRONT-RUN PHASE TRANSITIONS. (EWS) ishares MSCI Singapore ETF (ALD) WisdomTree Asia Local Debt Fund (WIP) SPDR DB International Government Inflation-Protected Bond ETF (EWSS) ishares MSCI Singapore Small-Cap ETF (BZF) WisdomTree Brazilian Real Fund (BWX) SPDR Barclays International Long-term Treasury Bond ETF (IBND) SPDR Barclays International Investment Grade Bond ETF (EPU) ishares MSCI All Peru Capped ETF (UDN) Powershares DB US Dollar Index Bearish Fund (EMLC) Market Vectors Emerging Markets Local Currency Bond ETF (FXE) CurrencyShares Euro Trust (GML) SPDR S&P Emerging Latin America ETF (EWZ) ishares MSCI Brazil Capped ETF (CEW) WisdomTree Emerging Currency Fund (BWZ) SPDR Barclays International Short-term Treasury Bond ETF (TUR) ishares MSCI Turkey ETF (AMLP) Alerian MLP ETF (RLY) SPDR Multi-Asset Real Return ETF (SGG) ipath Dow Jones AIG Sugar Total Return Sub-Index ETN (ICOL) ishares MSCI Colombia Capped ETF (EWG) ishares MSCI Germany ETF (BKLN) Senior Loan Portfolio ETF (EWN) ishares MSCI Netherlands ETF (CQQQ) Guggenheim China Technology ETF (EPHE) ishares MSCI Philippines ETF (XRT) SPDR Retail ETF (EIS) ishares MSCI Israel Capped ETF (XTL) SPDR S&P Telecom ETF (ITA) ishares U.S. Aerospace & Defense ETF (KRE) SPDR S&P Regional Banking ETF (IAI) ishares U.S. Broker-Dealers ETF (ARGT) Global X FTSE Argentina 20 ETF (IWO) ishares Russell 2000 Growth ETF (EWJ) ishares MSCI Japan ETF (DXJ) WisdomTree Japan Hedged Equity Fund (DXJS) WisdomTree Japan Hedged SmallCap Equity Fund (BNDX) Vangaurd Total International Bond Market ETF (IBB) ishares Nasdaq Biotechnology ETF (IHE) ishares U.S. Pharmaceuticals ETF (UUP) PowerShares DB US Dollar Index Bullish Fund Volatility-Adjusted Multi-Duration Momentum Indicator Reading -2.30x -2.07x -2.03x -2.03x -1.99x -1.97x -1.94x -1.94x -1.93x -1.92x -1.92x -1.90x -1.90x -1.89x -1.88x -1.86x -1.84x -1.80x -1.79x -1.79x 0.47x 0.50x 0.51x 0.53x 0.59x 0.60x 0.61x 0.61x 0.67x 0.73x 0.79x 0.85x 0.90x 0.91x 1.05x 1.23x 1.23x 1.35x 1.37x -3.0x -2.5x -2.0x -1.5x -1.0x -0.5x 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 1.99x This chart highlights the top-20 and bottom-20 VAMDMI readings across the universe of [liquid] global macro factor exposures. This snapshot is helpful to investors in two ways: First, it consistently identifies which markets are at/near oversold or overbought territory and likely due for counter-trend price action or a [potential] sustained reversal. Secondly, the composition of the top and bottom twenty VAMDMI readings helps to confirm existing trends at the primary asset class level OR helps to prospectively signal meaningful rotations at the primary asset class level. HEDGEYE 5

BEAT THE BENCHMARK. (AMLP) Alerian MLP ETF (XLU) Utilities Select Sector SPDR Fund (GDX) Market Vectors Gold Miners ETF (XLE) Energy Select Sector SPDR Fund (IEZ) ishares U.S. Oil Equipment & Services ETF (XLP) Consumer Staples Select Sector SPDR Fund (IWD) ishares Russell 1000 Value ETF (IUSV) ishares Russell 3000 Value ETF (USMV) ishares MSCI USA Minimum Volatility ETF (XOP) SPDR S&P Oil & Gas Exploration & Production ETF (XLF) Financial Select Sector SPDR Fund (VNQ) Vanguard REIT ETF (OEF) ishares S&P 100 ETF (DIA) SPDR Dow Jones Industrial Average ETF Trust (VLUE) ishares MSCI USA Value Factor ETF (IWS) ishares Russell Mid-Cap Value ETF (SPY) SPDR S&P 500 ETF Trust (XLI) Industrial Select Sector SPDR Fund (IWB) ishares Russell 1000 ETF (IWN) ishares Russell 2000 Value ETF (IWV) ishares Russell 3000 ETF (IYT) ishares Transportation Average ETF (XLK) Technology Select Sector SPDR Fund (KIE) SPDR Insurance ETF (XLB) Materials Select Sector SPDR Fund (MTUM) ishares MSCI USA Momentum Factor ETF (IWR) ishares Russell Mid-Cap ETF (PFF) ishares US Preferred Stock ETF (QQQ) PowerShares NASDAQ Trust (ETF) (IWF) ishares Russell 1000 Growth ETF (IUSG) ishares Russell 3000 Growth ETF (IHI) ishares U.S. Medical Devices ETF (SMH) Market Vectors Semiconductor ETF (ITB) ishares U.S. Home Construction ETF (XLV) Health Care Select Sector SPDR Fund (IWP) ishares Russell Mid-Cap Growth ETF (IWM) ishares Russell 2000 ETF (FPX) First Trust U.S. IPO Index Fund (XLY) Consumer Discretionary Select Sector SPDR Fund (XRT) SPDR Retail ETF (XTL) SPDR S&P Telecom ETF (ITA) ishares U.S. Aerospace & Defense ETF (KRE) SPDR S&P Regional Banking ETF (IAI) ishares U.S. Broker-Dealers ETF (IWO) ishares Russell 2000 Growth ETF (IBB) ishares Nasdaq Biotechnology ETF (IHE) ishares U.S. Pharmaceuticals ETF Volatility-Adjusted Multi-Duration Momentum Indicator Reading -1.84x -1.39x -1.35x -1.33x -1.32x -1.19x -1.05x -0.98x -0.86x -0.80x -0.76x -0.74x -0.74x -0.68x -0.66x -0.62x -0.60x -0.55x -0.48x -0.44x -0.42x -0.37x -0.36x -0.28x -0.25x -0.13x -0.02x 0.02x 0.03x 0.03x 0.11x 0.22x 0.29x 0.30x 0.34x 0.38x 0.41x 0.42x 0.46x 0.60x 0.61x 0.67x 0.73x 0.79x 0.90x -2.5x -2.0x -1.5x -1.0x -0.5x 0.0x 0.5x 1.0x 1.5x 2.0x 1.35x 1.37x This chart ranks each of the VAMDMI readings across the 47 sector and style factor exposures TACRM tracks within the U.S. equity market. This snapshot is helpful to investors in two ways: First, it consistently identifies which sectors and style factors are at/near oversold or overbought territory and likely due for counter-trend price action and/or a sustained reversal. Secondly, the composition of the top and bottom ten VAMDMI readings helps to confirm existing fundamental narratives (e.g. lower gas prices should stimulate consumption activity and perpetuate faster GDP growth ) OR helps to prospectively signal meaningful rotations in sector and style factor leadership. HEDGEYE 6

KNOW WHERE TO DIG AND WHY. 90% Percentage of Exposures w/ a VAMDMI Reading +1x Percentage of Exposures w/ a VAMDMI Reading -1x 80% 70% 60% 50% 40% 30% 38% 56% 79% 57% 50% This chart shows the relative strength or weakness at both the primary and secondary asset class levels based on the breadth of momentum across the constituent markets that comprise each primary asset class. This snapshot of momentum dispersion is an effective way for investors to quickly determine which asset classes offer the best opportunities for relative value trades. 20% 10% 0% 3% Fixed Income & Yield Chasing 20% 5% 0% 0% 0% 0% DM Equities EM Equities Foreign Exchange Commodities Cash* Trends in this indicator of asset class breadth form the basis upon which TACRM generates its asset class rotation signals as detailed on the next two slides. HEDGEYE 7

INVEST WITH THE WIND AT YOUR BACK. Smart Beta Marginal Asset Allocation Delta 30% 20% DM Equities = 27% Much like within the equity market, changes in the trend of market breadth can be a powerful signaling tool for the overall direction of the market. TACRM applies a similar concept to the process of signaling asset class rotations. y-axis: Deviation From 6MMA 0% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% Commodities = 6% -10% Foreign Exchange = 1% Fixed Income & Yield Chasing = 18% 10% Cash* = 34% -20% -30% -40% -50% x-axis: Deviation From 3MMA EM Equities = 14% Specifically, TACRM determines a likely weighting to each of the primary asset classes by calculating its trending share of cumulative positive market breadth across the six primary asset classes. For example, a 20% weighting for a specific asset class would imply that its share of cumulative positive market breadth has averaged 20% over the past three months. All told, our Smart Beta Marginal Asset Allocation metric provides a dynamic estimate for how much marginal investment capital may be over or under exposed to a particular asset class. Deviations from the respective trailing six-month trends in these weightings can be said to represent the presence of rotation-based capital flows. HEDGEYE 8

TRACK HOW YOUR PEERS ARE POSITIONING ON THE MARGIN. y-axis: Percentile of Readings Since Start of 2008 100% 80% 60% 40% Fixed Income & Yield Chasing = 18% 20% Commodities = 6% EM Equities = 14% Cash* = 34% DM Equities = 27% 0% Foreign Exchange = 1% -20% 0% 20% 40% 60% 80% 100% -20% Smart Beta Marginal Asset Allocation Percentile x-axis: Percentile of Readings on a 1yr Basis Much like within the equity market, changes in the trend of market breadth can be a powerful signaling tool for the overall direction of the market. TACRM applies a similar concept to the process of signaling asset class rotations. Specifically, TACRM determines a likely weighting to each of the primary asset classes by calculating its trending share of cumulative positive market breadth across the six primary asset classes. For example, a 20% weighting for a specific asset class would imply that its share of cumulative positive market breadth has averaged 20% over the past three months. All told, our Smart Beta Marginal Asset Allocation metric provides a dynamic estimate for how much marginal investment capital may be over or under exposed to a particular asset class. Deviations from the respective trailing six-month trends in these weightings can be said to represent the presence of rotation-based capital flows. HEDGEYE 9

MASTER BIG DATA. ALL TOLD, WE BELIEVE BIG DATA IS THE FUTURE OF INVESTMENT ANALYTICS AND OUR TACTICAL ASSET CLASS ROTATION MODEL (TACRM) IS AMONG THE INDUSTRY S BEST BIG DATA TOOLS FOR THE PURPOSES OF GLOBAL MACRO RISK MANAGEMENT. SPECIFICALLY, TACRM HELPS INVESTORS DISTILL MASSIVE QUANTITIES OF TRENDING PRICE, VOLUME AND VOLATILITY DATA ACROSS HUNDREDS OF FACTOR EXPOSURES INTO CONCISE, ACTIONABLE AND RELIABLE MARKET COLOR, WHICH IS PRESENTED IN THE FOLLOWING TABLE: HEDGEYE 10

HOW SMART IS SMART BETA?

FIXED INCOME & YIELD-CHASING BACKTEST RESULTS 9 8 7 6 5 4 3 2 1 0 Smart Beta INCREASING Exposure to Fixed Income & Yield Chasing (Trailing 5yr Cumulative 1wk % Change: 28.2%) Smart Beta DECREASING Exposure to Fixed Income & Yield Chasing (Trailing 5yr Cumulative 1wk % Change: -3.2%) JPM Global Aggregate Bond Index - Total Return Unhedged USD 560 540 520 500 480 460 440 420 400 380 HEDGEYE 12

DEVELOPED MARKET EQUITIES BACKTEST RESULTS 9 Smart Beta INCREASING Exposure to DM Equities (Trailing 5yr Cumulative 1wk % Change: 56.9%) Smart Beta DECREASING Exposure to DM Equities (Trailing 5yr Cumulative 1wk % Change: -34.1%) MSCI World Index 1,800 8 7 6 1,600 1,400 5 4 3 1,200 1,000 2 1 0 800 600 HEDGEYE 13

EMERGING MARKET EQUITIES BACKTEST RESULTS 9 8 7 6 5 4 3 2 1 0 Smart Beta INCREASING Exposure to EM Equities (Trailing 5yr Cumulative 1wk % Change: 46.8%) Smart Beta DECREASING Exposure to EM Equities (Trailing 5yr Cumulative 1wk % Change: -50.8%) MSCI Emerging Markets Index 1,350 1,250 1,150 1,050 950 850 750 650 550 450 HEDGEYE 14

FOREIGN EXCHANGE BACKTEST RESULTS 9 8 7 6 5 4 3 2 1 0 Smart Beta INCREASING Exposure to Foreign Exchange (Trailing 5yr Cumulative 1wk % Change: 2.7%) Smart Beta DECREASING Exposure to Foreign Exchange (Trailing 5yr Cumulative 1wk % Change: -26.3%) PowerShares DB US Dollar Index Bearish Fund 30 29 28 27 26 25 24 23 22 21 HEDGEYE 15

COMMODITIES BACKTEST RESULTS 9 Smart Beta INCREASING Exposure to Commodities (Trailing 5yr Cumulative 1wk % Change: 8.5%) Smart Beta DECREASING Exposure to Commodities (Trailing 5yr Cumulative 1wk % Change: -44.3%) Thomson Reuters/CoreCommodity CRB Commodity Index 480 8 7 6 430 380 5 4 3 330 280 2 1 0 230 180 HEDGEYE 16

CASH* BACKTEST RESULTS 9 Smart Beta INCREASING Exposure to Cash* (Trailing 5yr Cumulative 1wk % Change: 422.8%) Smart Beta DECREASING Exposure to Cash* (Trailing 5yr Cumulative 1wk % Change: -66.8%) Chicago Board Options Exchange SPX Volatility Index 80 8 7 6 5 70 60 50 4 3 2 1 40 30 20 0 10. *CASH IS BACKTESTED WITH THE VIX UNDER THE ASSUMPTION THAT HIGHER VOLATILITY PERIODS INCREASE THE PROPENSITY FOR INVESTORS TO RAISE CASH. HEDGEYE 17

TRADING WITH TACRM

PRICE + VOLUME + VOLATILITY = INFORMED DECISION-MAKING 2 1 1 0-1 -1-2 Risk Management Decision-Tree: S&P 500 Index (SPX) Last Price Support Resistance 2080 2070 2066.36 2060 2050.08 2050 2039.69 2040.24 2040 2030 2020 2010 2005.88 2000 1990 1980 1970 Price Volume Volatility This chart is a summary snapshot of the price, volume and volatility signals TACRM employs for the purposes of active risk management. The sign of the black bars indicate whether the specific factor is signaling BUY (positive reading), SELL (negative reading) or DO NOTHING (reading of zero) which in itself is a risk-managed decision. The charts on the following three slides detail how such signals are produced for each specific factor. The blue line highlights today s intraday high price, intraday low price and last and/or closing price, in order from left to right. The support and resistance levels indicated by the green and red lines are a function of the 50-day EMA. Specifically, if last price > 50-day EMA, then support = 50-day EMA and resistance = 50-day EMA + the largest spread between the closing price and the 50-day EMA over the previous 50-day period. The inverse is true if last price < 50-day EMA. HEDGEYE 19

PRICE BACKTEST RESULTS BUY SIGNAL: LAST PRICE IS GREATER THAN ITS TRAILING 50-DAY EXPONENTIAL MOVING AVERAGE. SELL SIGNAL: LAST PRICE IS LESS THAN ITS TRAILING 50-DAY EXPONENTIAL MOVING AVERAGE. 9 8 7 6 5 4 3 2 1 0 Buy S&P 500 Index (Trailing 5yr Cumulative 1D % Change: 149%) Sell S&P 500 Index (Trailing 5yr Cumulative 1D % Change: -84.5%) S&P 500 Index (SPX) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 HEDGEYE 20

VOLUME BACKTEST RESULTS BUY SIGNAL: THE RESPECTIVE TRAILING 3-WK TRENDS IN PRICE AND VOLUME ARE BOTH POSITIVE. SELL SIGNAL: THE TRAILING 3-WK TREND IN PRICE IS NEGATIVE WHILE THE TRAILING 3-WK TREND IN VOLUME IS POSITIVE. 9 8 7 6 5 4 3 2 1 0 Buy S&P 500 Index (Trailing 5yr Cumulative 1D % Change: 19.8%) Sell S&P 500 Index (Trailing 5yr Cumulative 1D % Change: -19.8%) S&P 500 Index (SPX) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 HEDGEYE 21

VOLATILITY BACKTEST RESULTS BUY SIGNAL: THE TREND IN ANNUALIZED 3-DAY TRUE VOLATILITY IS NEGATIVE ACROSS MULTIPLE DURATIONS (I.E. ON AT LEAST TWO OF THE FOLLOWING THREE DURATIONS: 100 DAYS, 150 DAYS AND 200 DAYS. OUR TRUE VOLATILITY METRIC SEEKS THE MAXIMUM PRICE DEVIATION AN INVESTOR COULD HAVE EXPERIENCED AN ANY GIVEN 1-DAY PERIOD, SUCH THAT RETURNS ARE CALCULATED USING THE LARGER OF THE FOLLOWING TWO ABSOLUTE VALUES: THE RATE OF CHANGE FROM THE PREVIOUS INTRADAY HIGH TO THE CURRENT INTRADAY LOW OR THE RATE OF CHANGE FROM THE PREVIOUS INTRADAY LOW TO THE CURRENT INTRADAY HIGH. SELL SIGNAL: THE TREND IN ANNUALIZED 3-DAY TRUE VOLATILITY IS POSITIVE ACROSS MULTIPLE DURATIONS. 9 8 7 6 5 4 3 2 1 0 Buy S&P 500 Index (Trailing 5yr Cumulative 1D % Change: 50%) Sell S&P 500 Index (Trailing 5yr Cumulative 1D % Change: 14.6%) S&P 500 Index (SPX) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 HEDGEYE 22

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