*Cost are calculated using Interactive Brokers commissions interactivebrokers.com

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2 Let me start with old school as long as you are opening only buy (long) positions, you can call yourself an investor. Optimal TAA model is adjusting the weight of each asset class (Stocks, Bonds, Gold and Crude oil) in portfolio on daily base, while Total TAA chooses the asset that has the highest growth potential in the next 24 hours. Even it is possible to use models for ETFs (SPY-TLT- GLD- USO), it is primary developed for futures (ES-ZN-CL-GC). The chat below shows the hypothetical movement of portfolio using TAA models (cost adjusted): 10,86 *Average 3M T-bill rate (1,64%) is used as risk free rate 7,25 *Cost are calculated using Interactive Brokers commissions interactivebrokers.com INSTRUMENTS: ES S&P 500 futures ZN T-notes 10 futures GC Gold futures CL Crude oil futures Front contract (rolled) 1,87 Daily data (21,00 GMT +0:00) from 2 Jan 1993 to 8 Feb 2013 Source: Trading Blox (tradingblox.com) Return: X10 = 900% The chart above shows the model result trading daily intervals on close price, but let s see how would it work if we trade daily interval in other hours: Volume (as % of total daily volume): Time: New York London Data source: Disk Trading It is evident that TAA model return are negatively correlated with market volume, because high volume usually causes more volatility and in this situation markets often indicate wrong signals (conversely, in the last year model noted best performance in the most liquid period). If we take a look on table that shows the liquidity expressed as turnover (price

3 x volume x contract size) of 12 most livid futures on GLOBEX, it is obvious that used instruments are some of most liquid instruments in the world but every market has it`s limits: Most liquid GLOBEX futures: Gold & Crude Oil Turnover per min 1 (GMT -5:00) Tick Contract Daily turnover Time GC CL Time GC CL ZN T-notes : : ES E-min S&P : : CL Crude oil : : ZB T-bond : : EC EUR : : ND Nasdaq : : GC Gold : : ZS Soybeans : : JY JPY : : AD AUD : : NG Natural gas : : BP GBP : : Even CL futures (in total) have higher turnover than GC, it is more distributed thought different maturity contracts, so the first (usually most liquid) CL contract makes only 54% of total turnover. The liquidity can be increased with other liquid CL contracts (which can increase costs) and with WBS Crude oil futures (ICE). All in all, it would not be a problem to trade TAA model with 10M, but 50M would be too much. I don t know how would Brent oil or other bond / index futures listed on other exchanges (I have only data from GLOBEX) fit in TAA model, but it is possible that they would have a positive effect. CL volume distribution: CHART BEHIND THE TEXT SHOWS THE TOTAL RETURN OF EQUAL WEIGHT PORTFOLIO WITH STOCKS, BONDS GOLD AND COMMODITIES FUTURES FROM ; US MARKET; Source: Bloomberg Well, you can`t make miracle with 4 instrument betting only buy side on daily interval, but since Tactical asset allocation is my doctoral dissertation title, like one of my first models, I have putted it in the presentation. What is my point as long as money supply growth surplus the GDP growth it will bring inflation and this is the main reason why financial markets are growing (+real economy growth). How economy goes thought cycles, some asset class will fall other will grow, but in the long run financial markets are growing was the biggest crash from 1931, so it is not logical to expect such a big drawdown in next few decades. So, you want to keep things simple: buy everything and hedge it (options, VIX), put some leverage or find a way to improve this buy and hold (like TAA model). My vision : I believe that gold topped in Sep 2011 and that we will not see higher gold price till 2020, but it can still be a good (uncorrelated) hedge. Commodity prices have more potential, especially if it comes to some conflicts (wars) which are logically to expect in this situation. Western economies are in the falling cycle (opposite from ) and we can`t expect high real economic growth, but stocks could grow because they are cheap inflation ate them in the last 10 years. Interest rates will not grow, they will stay low, but I don`t believe they can fall significantly anymore. Like I said, inflation has very important role in financial markets and there must be higher inflation to eat / clean all this debt and this inflation can push stocks and commodity prices up- not real economic growth. My opinion: euro will continue to fall (maybe crash) and dollar will become stronger is the next important turning point (1980/ / this are most important dates, 2008/10 was just a half of cycle) For example, the turnover per min in 12:00 represent the average turnover in 11:59, 12:00 & 12:01

4 Since futures are leveraged and you probably would not use all leverage, trading futures leaves majority of portfolio balance in cash, so is clever to invest it in something and stocks can be a good option. But, let s first see how they are liquid - 01 Feb 2013 was an normal day, I went on Reuters site and collected the data from 13 major stock indexes (countries) and calculated a few turnover indicators: TURNOVER PER MIN 2 (Source: Routers) INDEX per min TOP 10 per min Index Currency to $ Trading minutes N stock sum per stock sum per stock FTSE GBP 1, ETF US USD S&P 500 USD NIKKEI JPY 0, IBEX EUR 1, DAX EUR 1, HSI HKD 0, CAC EUR 1, Ibovespa BRL 0, AEX EUR 1, S&P TSX CAD 1, BELL EUR 1, MXSE MXN 0, Straits t. SGD 0, I must admit that Wall street was always my first love and I was very surprised by the domination of FTSE stocks from the aspect of liquidity. But unlike US, UK has 0,5% stamp duty on share transfers which makes stocks trading a mission impossible there is an option to trade them thought CFD (they are excluded from tax law and also have some more advantages) but trading CFDs is much more expensive (CFD brokers commission is usually around 0,1%). For this reasons I have decided to stick to US ETFs and stocks - based on average turnover in the last three months I have created 5 lists of most liquid ETFs and stocks: 5 LISTS CONTENTS AND TURNOVER (per minute in the last 12 months); 3 Source: Yahoo finance ETF 1 ETF 2 STOCKS 1 STOCKS 2 STOCKS 3 SPY DIA AAPL AMZN FCX IWM XLE GOOG PFE ORCL QQQ TLT BAC AIG ABT EEM* EWZ MSFT WFC CVX GLD* FXI* C IBM F GDX* IYR XOM NFLX WMT VXX* IVV INTC QCOM MRK EFA TNA* JPM JNJ HPQ VWO* SDS* GE CSCO GS XLF EWJ T PG VZ ***The turnover/volume on open and close is usually significantly larger!!! 2 Turnover per min = volume x price / trading minutes 3 * EEM-XLV before 15,4,2003;GLD-XLY before 18,11,2004;GDX-XLU before 23,5,2006;VXX-MDY before 30,1,2009;VWO-LQD before 10,3,2005;FXI-XLK before 12,10,2004;TNA-XLI before 19,11,2008;SDS-XLB before 13,7,2006

5 Since stocks in US make most volume around open and close, I have made an algorithm that determines the best share of each stock/etf from the list (to be in long or short position) on every open and close of exchange the hypothetical movement of portfolios can be seen from the next chart: Data source: Yahoo finace Cost calculation: since average price of selected instruments was around 50$, cost of spread is 0,0002% per trade (assuming that bid-ask price was 50,00-50,01). Since many stock brokers offer fixed commission (flat) per order, I have assumed 7,5 $ (industry average) per side on 500,000$ value order. All in all, I believe that costs are fairly calculated, especially if we take into account that cost calculation assumed changing the 100% of portfolio on every open/close, even if in some trading points the change of portfolio structure would be insignificant. How it works and possible improvements: Firstly, there is an algorithm/trading strategy that trades all 10 stocks from the list, and this is the main part of this system. After that, second algorithm picks stocks based on performance of first algorithm. Simplest, the first algorithm trades stocks, second manage strategies. Results can be better and more stable if: 1.we pick stocks from list of more than 10 stocks, 2.logicaly create list from 10 stocks that produce good and stable return using first/main algorithm. All in all, I have tried to develop several algorithms for trading stocks (as I said Wall street was my first love) and this is the best one. I tested it with UK/FTSE and the results would be similar (without stamp duty). Well, it assumes market order and this is its disadvantage in the future I will try to make algorithms with limit orders. I didn`t test it in details, but algorithm can be useful even with futures (tested on agricultural), don`t know about currencies/forex.

6 I hoped that I will finish one intraday (1H/15min) trading system for FX futures, I made a good base but unfortunately, I didn`t have time to finish it jet. I don`t know when it will be done, maybe I need few more days, maybe few months, but it has the potential to be my best trading system. This is why I decided to put one logical and very reliable strategy in the long run VIX-ES. The blue line represents Short-term model which is adjusting the weight of ES and VIX short-term futures on the daily base, while keeping the weight of mid-term VIX futures fixed. Like previous systems, chart shows the results without leverage but it is optimized to be leveraged around x5. Even it produces less return from the mid-term model, it is suitable for the larger amount of portfolio (cash). Oppositely, Mid-term trading model produces more return, but since mid-term VIX contracts that have significant role in this model are less liquid, like the return is more volatile, so it is not proposed to be highly leveraged. WITHOUT MID-TERM VIX CONTRACT Mar 26, 2004 Mar 15, 2006 S&P 500 (ES), SHORT-TERM and MID-TERM VIX future contracts Mar 26, 2004 May 3, 2013 (since the introduction of VIX futures) Daily close data; source: From the next table we can see the liquidity of VIX futures which can be traded only during Wall Street session (more/less). If we chose Fixed weight model (only rolling without trading) even 5x leveraged 50M would not be a problem (ES occupies significant proportion), but trading model lowers the potential to not more than 10M. Also, there are many liquid VIX ETFs. VIX FUTURES TURNOVER: Jan May 2013 VIX (VX) futures: Average daily turnover Average turnover per min VIX front contract VIX - VX VIX - VX VIX - VX VIX - VX VIX - VX Mid-term (VX4-6)

7 1. It is not a question do this models work... the right question is: For how long? If we look, for example, one trading algorithm on S&P now, it was working for 50 years but nothing last forever, people will figure it out sooner or later. The goal of trading system it is to get a trend and the opposite directions (shorting a strategy) would be one of the best strategies for But my point is that constant aspiration for finding new, original and fresh ways to trade must be an imperative if you want to be successful. 2. Trading is nothing else but allocation between long-short positions of different market instruments...the portfolio management is allocation between trading strategies. I have spent a lot of time and energy trying to make an buy/short algorithm for trading single instruments, one of them you can see upside, stock picking strategy is also mostly based on that kind of algorithm... but I have never found a universal trading system that would work on majority of instruments/markets/periods and I don t believe that it is even possible. Trading only one instrument assumes 3 choices: buy, short or flat, but more instruments provide much more options and possibilities. Secondly, it is much easier to trade strategies nor to trade instruments. 3. More uncorrelated strategies (more diversification) would produce more stable return, and the stability is the key determinant of potential leverage. My head is full of ideas how to improve the existing models like how to try to develop new ones. Models in this presentation are assuming market orders (and in-calculate spreads) but recently I have started to test/play with limit types orders it is not the same thing, but I see it as the logical development direction in which I would like to move in the future. 4. Sky is not the limit, nor is the volume... the limit is the Thank you for viewing my presentation every critic, comments or suggestions are welcomed. For more information you can contact me: Ivo Jelenaca [email protected] Mobile: 00385/ PhD student (near end) at Juraj Dobrila University Pula, Croatia