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Quarterly Newsletter

Q3 - 2015

Geneviève Blouin, CFA, CMT Keith Porter, ASIP 300 St-Sacrement

Suite 423 Montreal, Quebec

H2Y 1X4 www.altervest.ca

(514) 448-4029

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Executive Summary

Emerging Markets The third quarter was exceptional for its extremely high volatility, low stock valuations, and general confusion. July saw the worst underperformance of Emerging Markets against Developed Markets since the LTCM crisis of 1998. China was at the forefront of the confusion: questions were raised about its economy, the Yuan devaluation and its stock market collapse. All these weighed heavily on the minds of investors. For the full emerging markets commentary see page 5.

What’s New? Our new smart volatility product will soon be available in a fund. See pages 3 & 4 of our Private Wealth Section to see how our smart volatility product can reduce total portfolio risk while enhancing returns when integrated into a traditional portfolio. Private Wealth Section: Our Balanced Alternative investment approach. S&P Enhanced Our S&P Enhanced product seeks to outperform the S&P Total Return by 300 basis points per year. Since Altervest launched this product in February 2015 it has delivered 11.52% as of the end of October. It has outperformed the S&P Total Return by 5.64%, well exceeding our outperformance target. In the third quarter the S&P Total Return had a roaring month in October delivering 8.44%. Altervest still managed to beat that phenomenal monthly index performance by 63 basis points. See fact sheet on page 6

Altervest Smart Volatility

Altervest’s Absolute return Volatility strategy delivered 6.73% in the third quarter, outperforming its benchmark more than 10 fold for the period. It continued to exhibit its negative correlation with the stock market: the S&P 500 fell by more than 6% for the period.

As opposed to most other volatility strategies Altervest’s Smart Volatility strategy is able to capture volatility spikes better. This was reflected in August when the strategy returned +9.09% while the benchmark dropped by 2.15%. Most of the quarter’s outperformance came during this period. Fear over an anticipated rate increase by the Fed and the devaluation in China spilled over causing the VIX to spike from about 15 to 53 (a spectacular move that took place in only a week).

July was a less glorious month for our strategy as it required us to hedge prior to the Greek referendum. The “no” vote resulted in one of the most precipitous drops in the VIX history causing us to lose 1.70% in one day. An unusual drop for our strategy which normally averages daily returns of 5.4 bps.

Since its June inception Altervest Smart Volatility is up 9.97%. As volatility picks up we expect the strategy to keep performing well.

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Private Wealth Section

Altervest’s Smart Volatility product: reduce portfolio volatility and enhance returns.

Altervest is about to launch its new Smart Volatility fund. We thought it would be interesting to show how it helps

reduce a standard portfolio’s overall volatility while enhancing its returns. In order to do so we used as an example a

typical portfolio1 that allocates 60% of its assets to stocks and 40% of assets in bonds.

1The typical portfolio composed of 30% Canadian equities, 30% International equities and 40% Canadian bonds.

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Inflexion point at 28%

Table of results: Smart Volatility Diversification Benefit.

The table above demonstrates that as the weight of the smart volatility product increases in the portfolio (see first

column), the portfolio’s overall volatility decreases (see second column). In the third column, one can see that as the

weight of smart volatility increases, total portfolio return also increases.

In conclusion, the addition of the Smart Volatility strategy in a typical portfolio’s asset mix reduces the volatility of the

overall portfolio while enhancing its returns. As a result the portfolio performs better while reducing its risk.

Optimal Smart Volatility weight to reduce portfolio volatility:

In this scenario the optimal weight to reduce overall portfolio volatility to its minimum is 28%. Altervest’s Alternative

Balanced Portfolio currently holds 15% of our smart volatility product. As we perceive market risk to increase, we can

compensate by increasing the Smart Volatility position to 20% (the maximum allowed by our Balanced Alternative

investment policy statement).

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*The SDR is an international reserve asset, created by the IMF in 1969 to supplement its

member countries’ official reserves. Its value is based on a basket of four key international

currencies, and SDRs can be exchanged for freely usable currencies.

Emerging Markets Commentary- By Keith Porter

The third quarter was exceptional for its extremely high volatility, low stock valuations, and general confusion. July saw

the worst underperformance of Emerging Markets against Developed Markets since the LTCM Crisis of 1998. In August

we saw another “once in a lifetime” spike in US volatility and collapse of the S&P, that seem to be increasingly common.

China was at the forefront of the confusion; what was going on with the economy? Why did they devalue? Why was the

stock market collapsing? The H-share market, in which the fund invests, performed similarly to other Developing

Markets; it was the domestic A-share market, in which foreigners generally do not invest, that made the headlines.

As the above chart shows, China H (HSCEI) went from being cheap to being even cheaper! Most of the downward

pressure happened because the Chinese authorities closed trading in over 1000 A-share stocks, forcing some investors

to short H-shares to raise cash.

Despite the headlines, China’s “devaluation” was nothing about a faltering economy and everything to do with

liberalizing the Capital Account - in exactly the way that the US and others have demanded for years. As a matter of

national prestige China wants their currency, the Yuan, to be included in the IMF’s SDR basket*. That requires China to

ease its Current Account restrictions.

We are very much in the camp of wishing the Federal Reserve would raise interest rates; the anxiety caused by the

constant “will-they-or-won’t-they” is in our view more damaging than the actual move itself, and that uncertainty is

adding to volatility not cutting it. We also agree with former Secretary of the US Treasury Paul O’Neil that 25bp is really

just a rounding error.

As a result, we were positioned to get long the markets ahead of the Fed’s early September rate meeting, with a target

entry point consistent with the 5 year lows in the markets – around $35 - 37 on EEM, (the NYSE listed Emerging Market

ETF). That meant we ended up “long-and-wrong” when the S&P collapsed in August, but in a reasonable position for the

rally in the market when the dust settled.

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Smart Eureka Outperformance Smart Eureka**

2007 20.40% 17.01% 3.39% Annualised return 19.41% 10.65%

2008 44.02% 20.56% 23.46% Annualised volatility 13.41% 3.77%

2009 11.25% 10.97% 0.29% Downside Deviation 2.03% 1.63%

2010 15.59% 6.98% 8.61% Sortino Ratio* 7.52 4.57

2011 16.81% 5.46% 11.35% Correlation with S&P TR -0.403 0.104

2012 14.24% 8.81% 5.44%

2013 9.59% 6.04% 3.55%

2014 6.12% -0.36% 6.49%

Average 17.25% 9.43% 7.82%

* Sortino Ratio used MAR = 2% (average inflation)

**CBOE Eurekahedge Relative Value Volatility Hedge Fund Index

Key Statistics 2007-2014 - BacktestAnnual Outperformance vs Eureka - Backtest

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec YTD

Altervest Smart Volatility - - - - - 1.52% -3.52% 9.09% 1.40% 1.49% 9.97%

Eureka - - - - - -0.38% 1.40% -2.15% 1.41% 2.09% 2.34%

Outperformance - - - - - 1.90% -4.92% 11.24% 0.00% -0.60% 7.63%

Altervest Smart Volatility - Performance 2015

$-

$50,000.00

$100,000.00

$150,000.00

$200,000.00

$250,000.00

$300,000.00

$350,000.00

$400,000.00

Altervest Smart VolatilityBacktest 2007 to 2014

Cumulative investment $100,000

AAR Eureka S&P TR

Key strengths Performs well in risk-on or risk-off environment

Tends to perform better when volatility is higher

Great diversification tool focused on capital preservation

FACTSHEET - ALTERVEST Smart Volatility

Strategy Description Altervest Absolute Return is a quantitative absolute return investment strategy that generates alpha through volatility movements. The product’s main objective is capital preservation. In order to minimize the frequency and the amplitude of drawdowns, the strategy mainly takes hedged positions through volatility spreads. When the risk reward dynamic is extremely advantageous it also combines uncorrelated strategies that have hedged market exposure. Our approach is designed to produce positive returns during quiet as well as turbulent market conditions. The strategy tends to deliver strong positive performance in times of crisis when volatility rises. Its negative correlation to the S&P Total return index makes it a great investment diversification tool.

- All statistics and data are back tested using monthly data and returns are reported net of 2/20 fees with a hurdle of LIBOR + 3%. Reported in US dollars.

Strategy Launched June 2015 for managed accounts. Minimum investment: 100 000$

Fund coming out shortly.

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S&P Enhanced S&P TR Outperformance S&P Enhanced S&P TR**

*2004 17.86% 12.05% 5.82% Annualised return 12.09% 8.06%

2005 6.34% 4.91% 1.43% Annualised volatility 14.42% 14.23%

2006 16.86% 15.79% 1.06% Downside volatility 3.71% 3.86%

2007 3.54% 5.49% -1.96% Sortino Ratio* 3.09 2.00

2008 -27.54% -37.00% 9.46% Information Ratio

2009 28.30% 26.46% 1.83% Tracking error

2010 19.92% 15.06% 4.85% Correlation

2011 4.95% 2.11% 2.84%

2012 26.10% 16.00% 10.10%

2013 37.84% 32.39% 5.45%

2014 13.83% 13.69% 0.14%

Average 13.45% 9.72% 3.73%*The returns for 2004 are annualized. They have been calculated from April to December.

Annual Outperformance vs S&P TR

* Sortino Ratio used MAR = 2% (average inflation)

**S&P Total Return

0.28%

0.976

Key Statistics 2004-2014

1.18

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

S&P Enhanced - 7.24% -1.05% 2.00% 2.00% -1.95% 2.31% -6.11% -1.66% 9.07% - - 11.52%

S&P TR - 5.75% -1.58% 0.96% 1.29% -1.94% 2.10% -6.03% -2.47% 8.44% - - 5.88%

Outperformance - 1.50% 0.53% 1.04% 0.71% -0.01% 0.21% -0.07% 0.82% 0.63% 5.64%

S&P Enchanced - Performance 2015

FACTSHEET - ALTERVEST S&P ENHANCED

Strategy Description Altervest S&P Enhanced is a quantitative product that is designed to consistently outperform the S&P 500 with small, infrequent and recoverable drawdowns relative to the index. The product’s goal is to outperform the S&P 500 Total Return by an average of 300 basis points annually. The strategy seeks to capture the volatility risk premium on the S&P 500 index through a mirror allocation in volatility only when the risk/return profile is advantageous. The strategy dynamically adjusts the size of its volatility position based on the level and term structure of volatility, and when warranted, can be long volatility. Under certain conditions, the strategy engages in a covered call writing process for part of the position. It can also easily be converted into a portable alpha strategy.

- All statistics and data are back tested using monthly data and are reported net of 0.5% annual management fees. Reported in US dollars.

The S&P 500 enhanced strategy has a live track record since February 2015 and has a hard close of 2 Billion USD$

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This communication is for informational purposes only and does not constitute a solicitation or offer to buy or sell securities. Any such offer will be made only to qualified investors by means of a confidential private offering memorandum, and only in jurisdictions where permitted by law. Past performance is not necessarily indicative of future results.