Service objectives

The following list represents the Key Service Objectives (KSO) for the Appleton Greene Investment Consulting service.

Appleton Greene & Co Global 1

Investment Strategies

 The primary objective is to expand the set of investment opportunities by introducing additional trading strategies with attractive risk/reward profiles. In many cases, investment managers are interested in trades with low or negative correlation to existing portfolios and we can propose such trades, some of which can be expressed directly with derivative products or alternative investments. On the quantitative investment strategies side, we offer a variety of stand-alone trading strategies supported by statistical analysis. The portfolio return is enhanced by monetizing such items as factor premiums, dividends, coupons and option premiums. Example strategies are equity short/long – relative-value, dispersion, correlation, enhanced equity; currencies – carry, value and momentum; commodities – carry, momentum, seasonalities, curve, roll-down and volatility; fixed income – directional (corporate – investment grade, subordinated, high-yield, emerging markets sovereign and corporate) and relative-value, curve, convexity, roll-down, carry (single and cross-asset), credit and capital structure arbitrage (convertibles, covered bonds, COCOs); derivatives – relative-value, curve trades, volatility, smile/skew and correlation, interest rate cap/swaption arbitrage; asset allocation strategies. What is unique in our proposition is that the risk and rewards of these strategies can be analyzed quantitatively with our hybrid cross-asset Monte Carlo methodology both stand-alone and at portfolio level. In relation to investments and portfolio analytics, we help with asset allocation, portfolio optimization, portfolio risk analysis, overlays, hedging tactical and strategic asset allocation, scenario testing. Some examples of investment structured products that are used for complex trading strategies are Cap Calls, Cap Puts, Digitals, Multi-Asset Range Accruals, Multi-Callable Range Accrual Notes, Accumulators/Deccumulators, TARF, Shark-Notes, Equity Booster Swaps, Synthetic Convertibles, Reverse Convertible Baskets (with trigger barriers). On securities selection side, we can help investment managers to expand their investment universes by adding exposures to investment opportunities in developed – US, EU Core, Peripheries and selected emerging markets – CEE, SEE, Russia, LatAm and GCC. The Investment Consulting service provides advise generally on the markets, sectors, securities and strategies, alternative investments and also on the management and optimization of existing portfolios in these markets.

Appleton Greene & Co Global 2

Factor Exposures

 Our Investment Consulting services start with performance attribution analysis of an existing client portfolio with the main objective of improving investment performance, which is done primarily by exiting some inefficient allocations and executing additional trades to deliver desired exposures to set of investment factors with attractive risk premiums. These factors are broad, persistent drivers of asset returns and could be sub-classified as macro, sector, country and style factors. Identification of factor exposures for a portfolio is based on factor and attribution analysis and we perform also what-if analysis to assess the effects of adding new positions. For instance, for index funds, we consult on smart beta constructions that replicate systematic exposure of the index by using asset with lower volatilities and thus improving return versus risk tradeoff. Obtaining the desired factor exposures can be achieved swiftly and efficiently by executing deals in liquid alternatives and derivatives. This factor investing approach is suitable for investment managers with both asset allocation style and securities selection style. In addition, we offer bespoke portfolio construction containing directly the desired exposure levels to the preferred set of risk factors, which is usually realized by using liquid alternatives (e.g. ETFs, trading strategy indices, delta-one certificates), derivatives and structured products. A second investment objective is increasing diversification, which is achieved by adding new assets, and thus controlling the factor exposures, but sometimes is it more directly and efficiently realized by using derivatives overlay. Derivatives overlays allow fund of fund managers for adding or reducing exposures to factors (e.g., sectors, styles and markets), by combining investments in funds with investments in derivatives. These overlay solutions can be on existing or new funds or on instruments from the existing or other asset classes such as interest rates, equity indices, currencies, inflation, commodities, credit default swaps. Third, we use factor models also for asset and liability management (ALM) and liquidity management at balance-sheet level.

Appleton Greene & Co Global 3

Enhancing Returns

 The Investment Consulting service provides return-generating investment ideas in developed and selected emerging markets in the traditional asset classes, specific to the return drivers for each asset class. This is based on our expertise in fundamental, technical and quantitative research (strategies). Proposed quantitative trading strategies are applicable for both developed (US, EU Core, Peripheries) and emerging markets, where we have substantial experience in the regions of CEE, SEE, Russia, LatAm and GCC and can advise on portfolio construction in the traditional asset classes and on available alternatives, overlays and hedges. The desired risk/rewards profile is achieved also by smart beta and portable alpha strategies, which are well suited for indexed and passive funds. The strategies are with various degrees of risks and can be combined to an existing investment portfolio or can be executed stand-alone. The objective is to enhance returns by using synthetic constructions which so far, because of their technical complexities, have been out of reach. We advise on strategies with derivative overlays, which can be used for managing slippage – portfolio inefficiencies that lead to lower return or bigger risk. They can be used also to reduce large exposure to systematic factors, which does not add much value to the fund’s performance. Alternatively, overlays can be used to add synthetic beta exposure to high portable alpha applications such as alternative asset investments and investments in real estate by, e.g., entering in index futures contracts, call options on index futures or enhanced indexing. Derivative overlays can be used to combine multiple hedge fund strategies in an integrated package.

Appleton Greene & Co Global 4

Risk Management

 One of the main objectives of our service is reducing financial risk by advising on portfolio insurance solutions, which can minimize volatilities of portfolio returns. This is achieved by adding positions with low or negative correlations to the existing portfolios. In this way, it is possible to offset market, equity, interest rate, credit spread and swap spread risks. This portfolio insurance works well in periods of market uncertainties when the preservation of capital is paramount. It is important to note that for exact risk quantification, an automated risk measurement and management platform is necessary and we can assess the cost and benefits of a risk platform and can advise on its design and architecture. In the insurance space, for retirement savings plans annuity businesses, we can consult on specific protection overlays, which can be activated. We help with the development and implementation of risk governance policies, risk and concentration limits for investment in specific asset classes, issues, sectors, geographies and countries. On market risk side, we help with implementation of VaR, ETL measurement, limits, sensitivities calculations (Delta, DV01, duration, CS01 and OAS sensitivities are very important in investment management) and design and implementation of hedging policies. For private banks, we help with balance-sheet management of portfolios of retail structured products by hedging portfolio sensitivities to the risk factors. Our approach is based on advanced statistical and econometric models. For insurance companies, we advise on implementing simulation engines to math assets and liabilities and satisfy regulatory under Solvency II. For depositary institution, we offer risk and regulatory advisory, which includes Basel II and Basel III frameworks and implementation (PFE, EE, EPE, LGD, IRC, DRC, Economic Capital, CRD IV), CCAR. For credit risk measuring, monitoring and hedging, we advise on PFE, CVA, DVA, BCVA, FVA and cVaR . We help with implementing the IFRS9 framework for reporting. We do stress-testing of our VaR models in order to identify situations that could create both extraordinary and plausible losses, following examples of previously defined scenarios which meet regulatory requirements. The requirements for the market risk stress testing are a set of simple parallel and inverting/steepening scenarios (in additional set of more complex scenarios can be required, these will be the combination of historical scenarios and complex term structure shifts; or configuration a contingent loss matrix, where the maximum loss under a fixed set of scenarios will be limited).


Appleton Greene & Co Global 5

Technology Change


 This objective aims to enhance the development of systems of strategic investment planning and management and the development of documentation. Specifically, we can help with design, description and analysis of technology requirements for investment management processes. This is necessary for trade booking, position evaluation and management, measuring, monitoring and mitigation of market risk. This service objective is to advise on technology improvements, toolkits for specific purposes and additions to the existing client infrastructures. We can consult on internal development of libraries for product and strategies evaluation and on developing of automated risk and performance management systems up to the levels of business and functional specifications. We can also make analysis and recommendations for purchasing of commercially available vendor solutions for trading, market access, return attribution and risk management. The second stage in formation and execution of an Information Technology Strategy Program (ITSP) is the analysis and assessment of the current state of strategic alignment between the investor’s established business strategy and existing IT services and operations. From the perspective of that current state as-is for the client at that time, a future-state projection is created to express the vision, purpose, value, and commitment to move toward a holistic enterprise strategy wherein business and technology strategy are very tightly coupled to achieve optimum outcomes for the corporation or organization. The Current State Analysis and Assessment element of the ITSP consists of: (1) a ‘RACI’ (Responsibility, Accountability, Consult, Inform) matrix of stakeholder and participant roles; (2) a ‘SWOT’ (Strengths, Weaknesses, Opportunities, Threats) analysis; (3) a ‘gap’ analysis review and assessment of fit (or lack thereof) between legacy or current technology relative to explicitly or implicitly stated business strategy; and, (4) a benchmark survey of the client’s IT services and operations value, performance and quality. The Future State Projection element of the ITSP consists of: (1) creation of an IT Service and Operations portfolio and catalogue; (2) definition of key performance indicators (KPIs), delivery metrics and success criteria; (3) specification of business and technology realignment objectives with refinement of Program Baseline deliverables as appropriate; (4) targeting and prioritization of strategic business outcomes and benefits to be achieved through holistic strategy alignment.