PAIRS TRADING PANELPAIRS TRADING PANEL

Steve Slavin - Co-Founder of Steve Slavin - Co-Founder of PairTrader.comPairTrader.com

Ron Schelling - Founder of 2Hedge.comRon Schelling - Founder of 2Hedge.com Douglas Ehrman – CEO and Co-Douglas Ehrman – CEO and Co-

Founder of PairsTrading.comFounder of PairsTrading.com

John Greeley - ModeratorJohn Greeley - Moderator

Global Hedge Fund Global Hedge Fund Industry Assets Exceed $1 Industry Assets Exceed $1

TrillionTrillion The $25 billion Pennsylvania State The $25 billion Pennsylvania State

Employees' Retirement System Employees' Retirement System pension doubled its allocation to pension doubled its allocation to hedge funds to 20% last year. hedge funds to 20% last year.

Massachusetts' state pension fund Massachusetts' state pension fund has allocated $1.6bn to hedge funds has allocated $1.6bn to hedge funds in one of the largest single block in one of the largest single block allocations in the US.allocations in the US.

Funds of FundsFunds of Funds

Arden Asset Arden Asset ManagementManagement

Ivy Asset Ivy Asset ManagementManagement

K2 AdvisorsK2 Advisors Silver CreekSilver Creek Pacific Pacific

Alternative Asset Alternative Asset Management Management CompanyCompany

Blackstone Blackstone Alternative Asset Alternative Asset ManagementManagement

Pacific Alternative Pacific Alternative Asset ManagementAsset Management

Morgan Stanley Morgan Stanley Alternative Alternative Investment Investment PartnersPartners

Mesirow Financial Mesirow Financial Advanced StrategiesAdvanced Strategies

ALTERNATIVE ALTERNATIVE INVESTMENTSINVESTMENTS

STYLESSTYLES CONVERTIBLE ARBITRAGECONVERTIBLE ARBITRAGE DEDICATED SHORT BIASDEDICATED SHORT BIAS EMERGING MARKETSEMERGING MARKETS EQUITY MARKET NEUTRALEQUITY MARKET NEUTRAL EVENT DRIVENEVENT DRIVEN FIXED INCOME ARBITRAGEFIXED INCOME ARBITRAGE GLOBAL MACROGLOBAL MACRO LONG/SHORT EQUITYLONG/SHORT EQUITY MANAGED FUTURESMANAGED FUTURES MULTI-STRATEGYMULTI-STRATEGY

Equity Market Neutral: Equity Market Neutral: Statistical ArbitrageStatistical Arbitrage

utilizes quantitative analysis of technical factors to utilizes quantitative analysis of technical factors to exploit exploit

pricing inefficiencies between related equity pricing inefficiencies between related equity securities,securities,

neutralizing exposure to market risk by combining neutralizing exposure to market risk by combining long and short positions.long and short positions.

The strategy is based on quantitative modelsThe strategy is based on quantitative models for selecting specific stocks with equal dollar for selecting specific stocks with equal dollar

amountsamounts comprising the long and short sides of the portfolio.comprising the long and short sides of the portfolio. Portfolios are typically structured to be market,Portfolios are typically structured to be market, industry, sector, and dollar neutral industry, sector, and dollar neutral

0

10

20

30

40

50

60

70

80

90

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

EastWestNorth

EQUITY - MARKET NEUTRAL INDEXSTANDARD & POORS 500

-50%

0%

50%

100%

150%

200%

250%

300%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

EQUITY S & P EQUITY S & P 500 MARKET 500 MARKET TOTAL TOTAL NEUTRAL NEUTRAL RETURN RETURN AVERAGE MONTHAVERAGE MONTH

BEST MONTHBEST MONTH WORST MONTHWORST MONTH MONTH STD DEVMONTH STD DEV ANNUAL STD DEV ANNUAL STD DEV BETA (vs S&P 500)BETA (vs S&P 500) SHARPESHARPE

0.84%0.84% 0.97%0.97%

3.26%3.26% 9.78%9.78%

-1.15%-1.15% -14.46%-14.46%

0.88%0.88% 4.52%4.52%

3.05%3.05% 15.67%15.67%

0.070.07 .0.97.0.97

2.132.13 0.440.44

Manager of managers Frank Russell has appointed Jacobs Levy, who is widely recognized as one of the top firms in the quant

industry, both in terms of theory and practice.”

D. E. Shaw group has made a conscious D. E. Shaw group has made a conscious effort to build a small team of effort to build a small team of extraordinarily gifted professionals, each extraordinarily gifted professionals, each among the very best in his or her among the very best in his or her profession.profession.

recruitment of world-class mathematicians, recruitment of world-class mathematicians, computer scientists, researchers, traders, computer scientists, researchers, traders, and high-tech entrepreneurs and high-tech entrepreneurs

has been described as “the most intriguing has been described as “the most intriguing and mysterious force on Wall Street.” and mysterious force on Wall Street.”

PAIRS RELATIVE (CBRL-PAIRS RELATIVE (CBRL-IHP)IHP)

-30%

-10%

10%

30%

50%

70%

90%

110%

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ov

19-D

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14-J

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6-F

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3-M

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25-M

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16-A

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25-J

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11-A

ug

3-S

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25-S

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17-O

ct

10-N

ov

3-D

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26-D

ec

21-J

an

12-F

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8-M

ar

30-M

ar

22-A

pr

14-M

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7-Ju

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29-J

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PA

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45

CL

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PAIRS RELATIVE CBRL IHP

50 DAY ROC (CBRL-IHP)50 DAY ROC (CBRL-IHP)50 DAY ROC

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

11-F

eb

25-F

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11-M

ar

25-M

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8-A

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22-A

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6-M

ay

20-M

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3-Ju

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17-J

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1-Ju

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15-J

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29-J

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12-A

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26-A

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9-Se

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23-S

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21-O

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4-N

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18-N

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2-D

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16-D

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30-D

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13-J

an

27-J

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10-F

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24-F

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9-M

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1-Ju

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15-J

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CBRL IHP

50 DAY ROC DIFF 50 DAY ROC DIFF (CBRL-IHP)(CBRL-IHP)

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2/11

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3

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6/11

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3

7/11

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3

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3

9/11

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3

10/1

1/20

03

11/1

1/20

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12/1

1/20

03

1/11

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4

2/11

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4

3/11

/200

4

4/11

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4

5/11

/200

4

6/11

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CBRL-IHP

PAIRS RELATIVE PAIRS RELATIVE (GP/MWV)(GP/MWV)

-20%

0%

20%

40%

60%

80%

100%

PR

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LA

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PAIRS RELATIVE GP MWV

50 DAY ROC (GP-MVW)50 DAY ROC (GP-MVW)50 DAY ROC

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

11-F

eb

25-F

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11-M

ar

25-M

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8-A

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22-A

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6-M

ay

20-M

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3-Ju

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17-J

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1-Ju

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15-J

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29-J

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12-A

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26-A

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9-Se

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23-S

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7-O

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21-O

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4-N

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18-N

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2-D

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16-D

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30-D

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13-J

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27-J

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10-F

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24-F

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9-M

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23-M

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6-A

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20-A

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1-Ju

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15-J

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29-J

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GP MWV

50 DAY ROC DIFF (GP-50 DAY ROC DIFF (GP-MVW)MVW)

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2/11

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10/1

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11/1

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12/1

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1/11

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2/11

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GP-MWV

PAIRS RELATIVE (K-GIS)PAIRS RELATIVE (K-GIS)

-20%

0%

20%

40%

60%

80%

100%

PR

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LA

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PAIRS RELATIVE K GIS

50 ROC (K-GIS)50 ROC (K-GIS)50 DAY ROC

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

11-F

eb

11-M

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11-A

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11-J

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11-J

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K GIS

50 DAY ROC DIFF (K-50 DAY ROC DIFF (K-GIS)GIS)

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2/11

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3

3/11

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11/1

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12/1

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1/11

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K GIS