STRADIVARI

TECHNICAL PERSPECTIVE
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STRADIVARI Technical Perspective, About STRADIVARI Advisors S.A.

„STP“, is a free monthly research note with
views and ideas on strategic Hedge Funds
allocation.
While Quantitative and Technical Analysis are
common tools for traders and investment
managers, we believe that it could be very
interesting to apply these tools to strategic
Hedge Funds allocation in order to bring a new
„light“.
It is of critical importance to understand that
our approach and model portfolio is driven
exclusively by quantitative and technical
analysis.
Régis Weiler
+352 691 256 256
rw@stradivari-cm.com
Uwe Truppel
+352 691 257 257
ut@stradivari-cm.com
We are consultants with a focus on Alternative
Investments.
We help alternative asset managers create
their brand identities and develop and
implement effective new marketing strategies
and programs to differentiate them from their
competitors in their asset raising efforts
towards German and French speaking
investors.
Other Publications
Free monthly Chartbooks showing how single
hedge fund strategies have behaved in the past,
with historical volatility, performance, Sharpe
ratios, relative performance & correlation
versus equities, bonds, commodities and global
hedge funds index
Research can be downloaded :
www.stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
PERSPECTIVE
technical driven ideas on strategical Hedge Funds allocation
January 2009

Facts 2008: „annus

annus horribilis“
horribilis -3 -2 -1 0 1 2 3

Equity Market Neutral

Negative Performance: -16% Distressed Securities
Net Outflows: $400bn Merger Arbitrage
Special Situations
Hedge funds AUM: $1.25 trillion
Convertible Arbitrage
% of strategies with positive performance: Fixed Income Arbitrage
37% Other Arbitrage
Statistical Arbitrage
Growth

Outlook 2009: Opportunistic

Short Selling
The hedge fund industry experienced a decline Value
Futures
of 40% ($800 bn) of AUM in 2008, a
Macro
combination of massive outflows and negative Market Timing
performance. Emerging Markets
Fixed Income (incl. ABL)
Alpha opportunities that have been eroded Multi-Strategy
when the industry AUM were at $ 2 trillions
(please add leverage), start to appear
a again
with AUM at $ 1.2 trillion (with limited
leverage due to high funding, margin Chart 1: Percentage of strategies with
requirements, prime brokers forc
forced positive performance (Greenwich Alternative
Alt
Investments Indices)
deleveraging). 100%
Deleveraging process and market liquidity
80%
problems put a huge pressure on prices, giving
very interesting arbitrage possibilities again. 60%

Extreme volatility was counterproductive for 40%

the vast majority of strategies followed by 20%

hedge funds: once volatility is back to „normal“, 0%
alpha generation will follow.
We expect high alpha for 2009
Hedge funds AUM expected at $1.0- $1.0 It is the first time since the Index inception in
$1.1trillion 1995 that the percentage of strategies with
positive performance went clearly trough 40%
Our Allocation: summary level. New historic low of 13% in october
reverted to old precedent low levels of 40 in
Strong OverWeight: Fixed Income Arbitrage,
Arbitrage
december.
Short Selling
OverWeight: Merger Arbitrage, Macro, Fixed
Table 1: Current Drawdown (Greenwich
Income
Alternative Investments Indices)
Small Overweight: Opportunistic, Other DD in Months 10 10 9 6
Arbitrage, Equity Market Neutral DD in % 18,3% 15,8% 14,8% 22,0%
Neutral: Convertible Arbitrage, Statistical Start Mai 98 Jun 02 Sep 00 Jun 08
End Feb 99 Mrz 03 Mai 01 Nov 08
Arbitrage, Futures, Market Timing, Emerging Avge DD per month 1,8% 1,6% 1,6% 3,7%
Markets
Small UnderWeight: Multi Strategies, Special In terms of time, the current DD is not the
Situations, Growth, Value longest, but in terms of percentage it is the
UnderWeight: Distressed Securities, Multi biggest. The average DD per month of the
Strategies current DD is almost twice as high as in
Strong UnderWeight: precedent DD phases.
STRADIVARI Advisors S.A.
Régis Weiler +352 691 256 256 rw@stradivari-cm.com
rw@stradivari
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
ut@stradivari
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009

Global Hedge Funds and Balanced Chart 2: 12-months rolling returns for Greenwich
Global HF Index (red line) and Bond-Equity-
Portfolio Analysis:
Commodity portfolio (45%-45%-10%)
It is interesting to note that a portfolio invested
in Global Hedge Funds (represented by
Greenwich Alternative Investments Indices)
60% P1 P4
50%

and a balanced Bond – Equity –Commodity 40%

30%
portfolio (45%-45%-10%) had a very similar 20%
12-months return profile since the start of 10%

2003. 0%
-10%
This is less true since October 2008 where we -20%
can observe a clear return difference. The 12- -30%

months return difference has never been so

high during the last 5 years, at more than 7.5%.

Since the launch of the Greenwich Alternative Chart 3: total return for Greenwich Global HF
Investments Indices in 1995, an investment in Index (red line) and Bond-Equity-Commodity
Hedge Funds has produced a return of 300% portfolio (45%-45%-10%)
where an investment in a balanced Bond –
Equity –Commodity portfolio (45%-45%-10%) 450% P1 P4
400%
has produced a return of 100%. 350%
Returns were similar from 1995 to mid 1998. 300%

From mid 1998 to the start of 2003, Hedge 250%

200%
Funds outperformed the balanced portfolio. 150%
100%

During this period the 12-months rolling 50%

0%
volatility was higher for Hedge Funds, but
thereafter it was always less or equal to the 12-
months rolling volatility of the balanced Bond –
Equity –Commodity portfolio (45%-45%-10%).
The current spike in 12-months rolling Chart 4: 12-months rolling volatility for
volatility of the balanced portfolio (almost Greenwich Global HF Index (red line) and Bond-
16%) is more than 60% over the Hedge Funds Equity-Commodity portfolio (45%-45%-10%)
volatility (10%)
18% P1 P4
We believe that the recent decoupling of the 16%
14%
12-months return profile and the 12-months
12%
rolling volatility could be the first signs of a 10%

new period of outperformance for Hedge 8%

6%
Funds. 4%
2%
0%

STRADIVARI Advisors S.A.

Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009

Chart 5: 12-months rolling returns for Greenwich Charts 5 to 7 show similar patterns for a
Global HF Index (red line) and Bond-Equity- balanced portfolio of Bond – Equity (45%-
portfolio (45%-55%) 55%) as for a balanced Bond – Equity –
Commodity portfolio (45%-45%-10%).
60% P5 P4
50%
In chart 7, it is worth to observe that the
40%
30% volatility of the Bond – Equity (45%-55%)
20%
10%
portfolio has been on average much higher
0% than for Hedge Funds since 2001.
-10%
-20%
-30%
-40%
STRADIVARI HEAT MAP

The goal of our heat map is to provide a visual

and easy to understand map showing the
Chart 6: total return for Greenwich Global HF current state of different technical and
Index (red line) and Bond-Equity- portfolio quantitative factors.
(45%-55%) Green is good, red is bad.

450% P5 P4 Explanations about factors:

400%
350%
300% Distance to HWM (high water mark):
250% Absolute performance in % that the strategy
200%
has to realize to reach precedent high.
150%
100% High distance to HWM is bad.
50% 0 means that the strategy is currently at all
0%
time high.

Expected Recovery Period:

This number gives an idea about the average
Chart 7: 12-months rolling volatility for time in years needed to reach the precedent
Greenwich Global HF Index (red line) and Bond- high. It is based on annualized performance
Equity- portfolio (45%-55%) since 1995.
High Expected Recovery period is bad.
No number when annualized performance
18% P5 P4
16% since 1995 has been negative.
14%
12%
10%
Technicals relative to Global Hedge Funds:
8% Approached based on technical analysis.
6%
From -3 to 3.
4%
2% 3 means a very good technical situation.
0% -3 means a very bad technical situation.

STRADIVARI Advisors S.A.

Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009

Table 2: STRADIVARI Heat Map

P e r f.
Vo l at i Co r r . To Ex pe ct e d Te chn i cal s
P e r f. P e r f 1 r e l at i ve t o Di st an ce
lity 1 Gl o b. HF Re co ve r y rel. t o
De c 08 Ye ar Gl o b al HF t o HWM
Ye ar I nd e x P eriod Gl o b al HF
i n de x

Global Hedge Fund Index 1,0% -15,8% 0,0% 9,5% 1,00 19,15% 1,72 0
Market Neutral Group 0,7% -12,2% 3,6% 7,8% 0,97 14,46% 1,40 1
Equity Market Neutral 0,0% -4,9% 11,0% 5,0% 0,74 7,12% 0,66 0
Event Driven (Sub-Group) 1,0% -15,9% -0,1% 9,2% 0,98 18,91% 1,66 -1
Distressed Securities -0,7% -20,9% -5,0% 10,1% 0,90 28,23% 2,50 -2
Merger Arbitrage 2,4% -1,8% 14,0% 6,4% 0,81 2,55% 0,33 2
Special Situations 0,8% -16,9% -1,1% 9,6% 0,99 20,41% 1,80 -1
Arbitrage (Sub-Group) 0,7% -13,4% 2,4% 9,8% 0,90 16,52% 1,80 1
Convertible Arbitrage -1,8% -38,0% -22,2% 24,0% 0,83 64,91% 7,65 0
Fixed Income Arbitrage 0,9% -12,5% 3,3% 9,5% 0,84 14,73% 1,63 3
Other Arbitrage -0,1% -6,8% 9,1% 6,4% 0,90 9,38% 1,75 1
Statistical Arbitrage 0,1% 0,0% 15,8% 4,8% 0,83 3,82% 0,46 0
Long/Short Equity Group 1,1% -21,9% -6,0% 12,5% 0,99 27,99% 2,19 -1
Growth 1,1% -28,5% -12,6% 15,9% 0,98 39,82% 3,13 -2
Opportunistic 0,9% -15,9% 0,0% 11,0% 0,96 20,15% 1,44 1
Short Selling -0,7% 30,1% 45,9% 14,9% -0,68 17,94% Perf.negative 2
Value 1,2% -23,1% -7,2% 13,1% 0,97 30,01% 2,18 0
Directional Trading Group 1,9% 9,6% 25,4% 6,8% 0,33 0,00% 0,00 1
Futures 2,0% 20,2% 36,1% 9,7% 0,00 0,00% 0,00 0
Macro 1,3% -4,6% 11,3% 6,3% 0,93 7,60% 1,08 2
Market Timing 1,6% -4,7% 11,1% 7,6% 0,74 6,14% 0,61 0
Specialty Strategies Group 0,2% -26,0% -10,1% 13,3% 0,99 35,07% 4,07 -1
Emerging Markets 0,1% -36,1% -20,3% 18,2% 0,97 56,54% 6,39 0
Fixed Income (incl. ABL) -0,3% -11,9% 4,0% 6,7% 0,84 17,00% 2,55 2
Multi-Strategy 0,6% -12,0% 3,9% 8,5% 0,98 15,28% 1,36 -1

Global Bond Index 3,7% 5,3% 21,2% 6,1% 0,38 0,00% 0,00 1
MSCI World 1,1% -43,5% -27,6% 24,9% 0,88 87,26% 22,51 -1
CRB Index -5,2% -36,8% -20,9% 36,7% 0,76 103,99% Perf.negative -1

A lot of “red” for Correlation to the global
hedge fund index.
The Short Selling strategy is by its nature
always negatively correlated to the global
hedge fund index. Only one strategy group,
Directional Trading Group, has shown a low
correlation to the global hedge fund index.
Distance to HWM:
Three strategies out of 18, Merger Arbitrage,
Statistical Arbitrage and Futures are near their
high.
Six strategies need to produce more than 30%
returns before expecting to charge
performance fees again.
Two strategies (Convertible Arbitrage,
Emerging markets) need to produce more than
50% returns before expecting to charge
performance fees again.
Chances to survive for the groups specialized in
these two strategies are poor. Expect closures,
restructuring, and start of new funds.

STRADIVARI Advisors S.A.

Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009

Recommended Allocation: table 2

BENCHMARK STRADIVARI STRADIVARI

Weight Rating Weighting
Market Neutral Group 24,40% 26,4%
Equity Market Neutral 5,60% + 7,9%
Event Driven (Sub-Group) 9,60% 6,4%
Distressed Securities 3,00% -- 1,2%
Merger Arbitrage 1,10% ++ 1,9%
Special Situations 5,50% - 3,3%
Arbitrage (Sub-Group) 9,20% 12,1%
Convertible Arbitrage 1,60% o 1,6%
Fixed Income Arbitrage 3,20% +++ 5,1%
Other Arbitrage 2,90% + 3,9%
Statistical Arbitrage 1,50% o 1,5%
Long/Short Equity Group 37,40% 33,7%
Growth 8,00% -- 3,2%
Opportunistic 8,00% + 8,6%
Short Selling 0,70% ++ 1,1%
Value 20,70% o 20,7%
Directional Trading Group 16,70% 22,3%
Futures 10,40% o 12,0%
Macro 5,70% ++ 9,7%
Market Timing 0,60% o 0,6%
Specialty Strategies Group 21,50% 21,4%
Emerging Markets 11,30% o 11,3%
Fixed Income (incl. ABL) 3,60% ++ 6,1%
Multi-Strategy 6,60% - 4,0%
100,00% 103,8%
Benchm arks are Greenw ich Alternative Investm ents Indices

BENCHMARK Weight: Weighting of each strategy within the "Greenwich Global Hedge Fund Index"
STRADIVARI Rating: over- and underweighting recommendation compared to BM-Weight
+++ Strong Overweight o Neutral - - - Strong Underweight
STRADIVARI Weighting: allocation recommended by STRADIVARI

STRADIVARI Advisors S.A.

Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009

Chart 8: Strategy Allocation

0% 5% 10% 15% 20% 25%

Equity Market Neutral

Distressed Securities

Merger Arbitrage

Special Situations

Convertible Arbitrage

Fixed Income Arbitrage

Other Arbitrage

Statistical Arbitrage

Growth

Opportunistic

Short Selling

Value

Futures

Macro

Market Timing

Emerging Markets

Fixed Income (incl. ABL)

Multi-Strategy
BENCHMARK Weight STRADIVARI Weighting

Chart 9: Group Allocation

0% 5% 10% 15% 20% 25% 30% 35% 40%

Market Neutral Group

Event Driven (Sub-Group)

Arbitrage (Sub-Group)

Long/Short Equity Group

Directional Trading Group

Specialty Strategies Group

BENCHMARK Weight STRADIVARI Weighting

STRADIVARI Advisors S.A.

Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009

Selected Charts

Greenwich Fixed Income Arbitrage: relative Merger Arbitrage: relative performance to

Global Hedge Fund Index
performance to Global Hedge Fund Index

Medium term down trend that started in 2003
has been broken in may 2008 (see arrow)
reinforced by a bullish divergence pattern.
Very good risk reward trade: stop @
preceeding low, target @ high in 2003.
Long term down trend that started in 1998
ended in august 2008, directly followed by a
sharp rebound that broke the low of 2000.
There is still plenty of room to go

Greenwich Short Selling: relative performance to Global Macro: relative performance to Global
Greenwich Global Hedge Fund Index Hedge Fund Index

Long term down trend that started in 1998

Medium term down trend that started in 2002 was broken in october 2008.
has been broken in mid 2007 reinforced by a Low of down trend was in may 2007 :
bullish divergence pattern. After a consolidation beginning of subprime crisis.
phase of 1 year (may 2008), momentum came in
and a rebound is taking place.
Target : preceeding high in 2002

STRADIVARI Advisors S.A.

Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009
Fixed Income: relative performance to Global
Hedge Fund Index
Long term double bottom supported by a
bullish divergence pattern and a break of the
medium term down trend that started in 2003.
Target @ high in 2003.
Directional Trading Group: absolute
performance since inception
Directional Trading Group: correlation to MSCI
World Index
STRADIVARI Advisors S.A.
Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
Directional Trading Group: correlation to Global
Hedge Fund Index
The Directional Trading Group, especially the
Managed Futures sector, is the only segment
with an intact upward trend, since 1995.
Noteworthy, that the correlation to the Global
Hedge Fund Index is declining since the
beginning of the crisis and the correlation to
the MSCI World is for more than a year nearly 0
or negative.
CRB: correlation to Global Hedge Fund Index
Again, as often seen in the past, the cyclical
correlation between the CRB and the Global HF
Index has risen from nearly uncorrelated levels
at the end of 2007 to the corridor between 0.6
and 0.9.
STRADIVARI TECHNICAL PERSPECTIVE:
technical driven ideas on strategical Hedge Funds allocation
January 2009
MSCI World: correlation to Global Hedge Fund
Index
The correlation between the MSCI World and
the Global HF Index has risen to normal levels
again, showing that levels around 0, that we
have seen at the end of 2007 are more an
exception than a new normality.
Equity Market Neutral: correlation to MSCI
World Index
Decreasing correlation between MSCI World
and Equity Market Neutral Group during the
last two and a half years showing the good
diversification character of this group from a
portfolio point of view.
STRADIVARI Advisors S.A.
Régis Weiler +352 691 256 256 rw@stradivari-cm.com
Uwe Truppel +352 691 257 257 ut@stradivari-cm.com
Important Information
This material is intended for informational purposes only
and should not be construed as an offer or solicitation for
the purchase or sale of any financial instrument.
The information provided herein reflects current market
practices and is not intended to constitute legal, tax, or
accounting advice; clients should consult their own
advisors on such matters.
The market valuations, terms, and calculations contained
herein are estimates only and are subject to change
without notice.
The views, opinions and strategies described herein,
which are as well subject to change, may not be suitable
for all investors.
The information provided is believed to be reliable,
however the Company does not guarantee its
completeness or accuracy.
The performance data contained herein has been
obtained from fund administrators as well as other
outside sources and, although it is believed to be accurate,
no guarantee of completeness or accuracy is being made.
Actual figures could be higher or lower subject to market
conditions. Clients should consider the potential risks and
further disclosure information associated with this
investment and the appropriateness with their financial
profile and objectives.
An investment in an alternative investment carries
substantial risks. The nature and extent of some of these
risks differ from traditional investments in stocks and
bonds. There can be no assurance that the advice or
information provided above will lead to superior
performance. In particular, the performance
of an alternative investment may vary substantially over
time. Investors bear the risk of losing all or part of their
investment and thus should carefully consider the
appropriateness of such investments for
their portfolio. While the information contained in this
document has been obtained from sources deemed
reliable, no representation is made as to its accuracy or
completeness, and it should not be relied on as such.
Past performance is not necessarily indicative of future
performance.