Quant Solutions Group

Nomura Global Quant Equity Conference 2011Introduction and OverviewRonny Feiereisen

Managing Director

© NomuraSTRICTLY PRIVATE AND CONFIDENTIAL

g g

Head of Quant and Delta One Marketing

Quant Fund Performance Affected by High Factor CorrelationVarious un-seen events resulting in high volatility and correlation in factor returns have caught many quant funds caught off- guard

110 00

115.00

0.6

0.7

Quant IndexCorrelation

March 2009 Value Rally / Regime Shift

European Sovereign Debt Crises

105.00

110.00

0 4

0.5

95.00

100.00

0.3

0.4

90.000.1

0.2

Momentum unwind and Middle East Unrest

85.000

Figure shows the performance of equal-weighted and asset-weighted quant fund indices relative to FTSE World in USD. The benchmark is comprised of 159 long-only global quant funds with around USD52bn under management. Correlation is the 60 day average absolute pairwise correlation between Composite Value, Momentum, Growth, Gearing, Profitability, Risk and Size factors

Factor Pairwise Correlations Relative Equal Weighted Relative Asset Weighted

Quant Fund Performance Affected by Lack of Factor TrendsLarge factor shake-up over the past 3 years with the most popular factors such as value and momentum showing the most significant shifts. This is similar to what we have seen in other regions...

Europe

250

300

350

100

150

200

Composite Value

0

50

160

60

80

100

120

140

Composite Gearing

Composite Risk

Size

0

20

40 Composite Momentum

Composite Profitability

Composite Growth

The Long/Short factors are constructed as stock screens on a given style parameter. We take the top/bottom quartile of the largest 300 stocks in FTSE World Europe Index (except Size where we use the whole universe)

Recent Factor Events and Reactions – March 2009 Regime ShiftThe re-risking seen after the bankruptcy of Lehman Brothers was clearly seen in the Value rally and momentum crash. g p y y yMagnitude in returns were highly significant with a probability of occurrence around once in every 60 years (assuming Normal Distribution)

March 2009– Regime Shift

15 00%

20.00%

25.00%

Second best monthly

Best monthly return since 2000

5.00%

10.00%

15.00%

Composite Value Monthly ReturnsComposite Momentum

Second best monthly return since 2000

-5.00%

0.00%

Monthly ReturnsStDev Composite Value

StDev Composite Momentum

-15.00%

-10.00%

Worst monthly return since 2000

3rd worst monthly return since 2000

-20.00%Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09

Recent Factor Events and Reactions – May 2010 European Sovereign Debt Crises First major signs of the effects of the European Sovereign debt crises in the Equity markets was seen through significantFirst major signs of the effects of the European Sovereign debt crises in the Equity markets was seen through significant shifts in quality-type factors and high beta type factors such as our Composite Risk factor

May 2010 – European Sovereign Debt Crises

4.0

5.0

Z Scores (Non Sector-Neutral)3rd best daily return since 2000

0 0

1.0

2.0

3.0 4th best daily return since 2000

-3.0

-2.0

-1.0

0.0

11th worst daily return since 2000

-4.003/05/2010 04/05/2010 05/05/2010 06/05/2010 07/05/2010 11/05/2010

Composite Value (Cheap/Exp) Composite Growth (High/Low) Composite Profitability (High/Low)C it Ri k (Hi h/L ) C it G i (Hi h/L ) Si (L /S ll)Composite Risk (High/Low) Composite Gearing (High/Low) Size (Large/Small)Composite Momentum (High/Low)

Recent Factor Events and Reactions – May 2010 European Sovereign Debt Crises Following the initial shock Summer 2010 investor behaviour was characterised by risk on risk offFollowing the initial shock, Summer 2010 investor behaviour was characterised by risk-on risk-off

May 2010 – European Sovereign Debt Crises

Composite Risk Style During Summer 2010

102.50

105.00

Composite Risk Style During Summer 2010

95.00

97.50

100.00

90.00

92.50

95.00

85.00

87.50

01/04/2010 01/05/2010 01/06/2010 01/07/2010 01/08/2010 01/09/2010

Recent Factor Events and Reactions – Jan 2011 Momentum Crash / Middle East unrestSignificant moves in Value and Momentum styles over several daysg y y

Jan / Feb 2011 – Momentum crash / Middle East unrest

Z Score Returns (Europe Non Sector-Neutral)

2.0

3.0Z Score Returns (Europe Non Sector Neutral)

0.0

1.0

2 0

-1.0

-3.0

-2.0

10/01/2011 11/01/2011 12/01/2011 13/01/2011 14/01/2011 17/01/2011 18/01/2011 19/01/2011 20/01/2011

Composite Value Composite Risk Composite Momentum

Recent Factor Events and Reactions – Jan 2011 Momentum Crash / Middle East unrestCorrelation between Value and Momentum nears 1 previously seen during March 2009 regime shiftCorrelation between Value and Momentum nears -1, previously seen during March 2009 regime shift

Jan / Feb 2011 – Momentum crash / Middle East unrest

0.8

1

20 Day Rolling Correlation (Value & Momentum)

0

0.2

0.4

0.6

0 8

-0.6

-0.4

-0.2

0

-1

-0.8

/01/

2010

/01/

2010

9/01

/201

07/

01/2

010

4/02

/201

02/

02/2

010

2/02

/201

02/

03/2

010

0/03

/201

08/

03/2

010

6/03

/201

05/

04/2

010

3/04

/201

0/0

4/20

109/

04/2

010

7/05

/201

07/

05/2

010

5/05

/201

02/

06/2

010

0/06

/201

08/

06/2

010

8/06

/201

06/

07/2

010

4/07

/201

02/

07/2

010

0/07

/201

09/

08/2

010

7/08

/201

05/

08/2

010

2/09

/201

00/

09/2

010

0/09

/201

08/

09/2

010

6/10

/201

04/

10/2

010

2/10

/201

0/1

1/20

109/

11/2

010

7/11

/201

05/

11/2

010

3/12

/201

03/

12/2

010

/12/

2010

9/12

/201

06/

01/2

011

4/01

/201

14/

01/2

011

/02/

2011

9/02

/201

17/

02/2

011

01 11 1 9 27 04 12 22 02 10 18 26 05 13 21 2 9 07 17 25 02 10 18 28 06 14 22 30 09 17 25 02 10 20 28 06 14 22 01 0 9 17 25 03 13 21 29 06 14 24 01 09 17

Traditional Quant Investing ChangingThe various unknown unknowns of the past 4 years have led to an evolution in quant strategies and risk management

With long-term efficacy of traditional factors in question, search for new alpha factors continues Moreover greater emphasis is being put on expanding quant approaches that are more dynamic

d d i i f f l i d i h i

Nomura Quant Conference 2011

and adaptive in terms of factor selection and weightings This quant conference aims to shed light on these issues Key Highlights:

Lauren Cohen (Harvard Business School) on complicated vs simple firms Andrew Harmstone (Morgan Stanley Investment Management) on risk measurement

techniquesG ( ) Joop Huij and Wilma De Groot (Robeco Asset Management) on the value anomaly and

distress risk Various Nomura Quant speakers on dynamic factor selection models, new alpha factors for

regions around the globeregions around the globe

Trends in the Quant MarketBesides this we have also witnessed other trends in the quant market

Proliferation of quant strategies and offerings Min variance strategies

Key Trends 2011

Emerging Markets focus

Increased sensitivities to risk management Intensification of hedging strategies – Firms have been quicker to react to events Broadening of hedging instruments – Away from standard hedging instruments such as index

futures, new ETFs such as Voltage (VOLT LN) have added a new dimension to hedging Specific hedging – Sophistication in hedging out specific risks has increased through the

usage of sector, custom baskets and style swaps

What is the consensus among quants now? By fully participating in this survey we hope we will be able to better ascertain what the buy-

side are thinking and doing This anonymous approach elicits information that cannot be obtained by the more usual

inferential methods.

Nomura OfferingsThe Quant Solutions desk provides weekly quant commentaries notes and timely ad-hoc alerts on style moves

Style Monitor and Commentaries