qCIO Global Macro Hedge Fund Strategy - November 2014

qCIO
Global Macro Hedge Fund Strategy

November 2014
Q M S Advisors
.
This material does not constitute investment advice and should not be viewed as a current or
past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any
investment strategy.
Av. de la Gare, 1 | 1003, Lausanne | CH

tel: +41 (0)78 922 08 77
e-mail: info@qmsadv.com
website: www.qmsadv.com
qCIO:
Capitalizing on Market Inefficiencies
Long-Term Returns from Short-Term Dislocations
In the long run, markets tend to behave like weighing
machines, which value assets rationally on the basis of
what they are actually worth. In the short term,
however, markets tend to be more like voting
machines, which reflect the often erratic desires and
fears of fickle publics and willful national governments.
Benjamin Graham
Q.M.S Advisors
Av. de la Gare. 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com
Page 1
qCIO:
Exploiting Temporary Mispricings
qCIO seeks to exploit these constantly evolving
economic conditions and the temporary mispricings
that result among individual geographies and asset
classes, opportunistically adjusting our investment
views in response to the changing patterns of risk and
reward in the markets.
qCIO does this through close quantitative analysis of
global pricing trends, business cycles, volatility levels
and other macro-economic signals.
Q.M.S Advisors
Page 2
qCIO:
A Market Neutral Global Macro Fund
Bespoke Tactical Macro Investing
qCIOs returns are driven not by the directional
movement of any one market but by exploiting shortterm mispricings among the markets themselves.
qCIOs derived alpha tends to be highly efficient due to
the targeted balance of risk and return it achieves
across markets.
qCIO: a customizable strategy with a consistent return
per unit of risk.
Q.M.S Advisors
Page 3
Quantitative Global Macro

Hedge Fund Strategy
November 2014
This material does not constitute investment advice and should not be viewed as a current or
past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any
investment strategy.
Table of Contents
Portfolio Objectives
Asset Classes and Market Coverage
Model Overview and Investment Process
Overview of Signals Across Investment Strategies
Derivation of Relative Return and Risk Expectations
Blending: Aggregation and Apportioning of Views
Portfolio Construction
Q.M.S Advisors
Page 5
Portfolio Objective
Quantitative Global Macro Strategy Focused On
Maximizing Risk-adjusted Returns
Example:
Excess Return over Cash
Volatility
Sharpe Ratio
Objective
10 - 20%
5 - 10%
2.0
Relative Tactical positions are formulated on an Absolute Return basis

To maximize risk-adjusted total return
Long or short positions may be taken in any asset classes
The portfolio may be implicitly leveraged
Trades are implemented with futures, forwards or option contracts
Stock-index futures, forwards or options on nine equity markets
10-year government bond futures, forwards or options in seven countries
Currency futures, forwards or options on seven currencies
Historical simulation does not guarantee future performance of any individually managed account or fund.
Q.M.S Advisors
Page 6
Coverage
Asset Classes and Markets
A set of Models covering multiple Asset Classes and Markets
Markets currently included in the modeling process
9 stock markets: US, Japan, UK, Eurozone, Switzerland, Australia, Canada,
Hong Kong and emerging markets
7 bond markets: US, Japan, UK, Germany, Australia, Canada, Switzerland
7 currency markets: USD, EUR, JPY, GBP, CHF, CAD,AUD
A system built around five independent set of models, with nonoverlapping signals and return drivers
Risk Premia: Intra-country Relative Value: Inter-country
Stock-Bond
Stock VS Stock
Bond-Cash
Bond VS Bond
Currency
Q.M.S Advisors
Page 7
Model Overview
Global Macro Strategy: Approach
An quantitative global macro investment strategy built around five
independent sets of models with non-overlapping signals and return drivers
Risk Premia Arbitrage
Intra-country Systems
Market Spreads
Inter-country Systems
FX
Stock VS Stock
Bond VS Bond
Cash VS Bond
Q.M.S Advisors
Bond VS Stock
Page 8
Investment Process
Investment Procedure Outline
Across all sub-systems
Portfolio Implementation
Pairwise Views
Blending
Derive direction
and confidence of
investment views
for all pairs
Derive expected
returns for all
assets through
Bayesian blending
Within each sub-system

Signals
Identification of
common signals for
all pairs
Q.M.S Advisors
Portfolio construction:
Tactical trades
implemented via
futures contracts
Page 9
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Investment Process
Investment Procedure Outline
All recommended strategies of the qCIO Model are based on expected excess returns derived
from blending investment views of five independent sub-systems designed for different asset
classes and markets; the weights of the views are determined by their relative statistical
confidence as well as their dynamic correlations.
Foreign Exch.
sub-system
Bond-Bond
sub-system
qCIOs
Blending
Model
Stock-Stock
sub-system
Cash-Bond
sub-system
Bond-Stock
sub-system
Expected Excess
Returns and Risks
Strategies
Q.M.S Advisors
Page 10
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Common Signals And Returns

Diversification Across Signals Of Different Nature
Across Asset Classes
Example (bond versus cash): 7 markets
7 iterations of the model
US Bonds vs. US cash, Japanese Bonds vs Japanese Cash, etc.
At each iteration, the dependent variable is defined as the excess return of bonds over
cash, hedged into USD
The explanatory variables correspond to the signal associated with the country under
consideration
A dynamic constant is included, corresponding to a risk premium
Within Asset Classes

Example (equity versus equity): 9 markets: Consider each possible pair
36 iterations
Japan vs. US, EU vs. US, EU vs. JP, UK vs. Japan, etc.
The dependent variable is the excess returns of the two stock markets considered
(relative to cash), hedged into USD
The explanatory variables correspond to the difference in signals between 2 markets
Example: Yield Gap for Japan vs. US = YG(USA)-YG(Japan)
No constant (premium) is included as there is no rationale as to why stock markets

should outperform one another
Q.M.S Advisors
Page 11
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Investment Process
Typology of Signals
Q.M.S Advisors
Page 12
Pairwise Views
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Sequential Derivation of Direction and Confidence

of Investment Views for Each Sub-System
Each pair of assets is considered in turn
The expected excess return of the pair of assets is the dependent
variable
Hindsight biases are minimized by assuming that all signals work
equally and moderately well at inception
The relative importance of each signal is determined by Bayesian
adaptive regression according to its consistency to performance
Direction and confidence of investment views are both expressed
as expected relative return and standard error
Q.M.S Advisors
Page 13
Signals
Pairwise
Views
Blending
Portfolio
Constru.
FX Signals Contribution By Type

Signals Ranking By Current Relative Explanatory Power
FX Sub-System: Current Signal Ranks (1 = Best)
USD
JPY
Risk-adjusted Carry
4
5
Yield Trend
5
1
1
Flows
3
Growth
4
1
GDP Revisions
4
4
1
Technicals
3.5
Composite
5
1
EUR
6
6
7
6
4
3.5
3
GBP
3
7
6
7
4
4.5
4
CHF
7
2
4
3
4
6
5
CAD
2
4
2
5
4
5
4
AUD
1
3
5
2
4
4.5
6
FX Sub-System: Last Week's Signal Ranks

USD
JPY
Risk-adjusted Carry
4
3
Yield Trend
2
4
Flows
3
1
Growth
2
3
GDP Revisions
4
4
1.5
4.5
Technicals
Composite
2
3
EUR
2
7
7
5
4
5
6
GBP
5
6
6
7
4
1.5
1
CHF
1
5
4
6
4
4.5
4
CAD
6
3
2
4
4
4
5
AUD
7
1
5
1
4
7
7
FX Sub-System: Signals' Weights

USD
Risk-adjusted Carry
18%
Yield Trend
12%
Flows
6%
Growth
8%
GDP Revisions
2%
Technicals
55%
EUR
12%
8%
10%
5%
7%
58%
GBP
12%
6%
10%
5%
7%
60%
CHF
12%
10%
8%
7%
6%
57%
CAD
13%
8%
10%
5%
8%
56%
AUD
16%
5%
11%
5%
5%
58%
Q.M.S Advisors
JPY
12%
10%
7%
11%
5%
54%
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Signals
Pairwise
Views
Blending
Portfolio
Constru.
Cash-Bond Signals Contrib. By Type

Bond-Cash Sub-System: Signals on scale from -5 to +5
US
Jap
Eur
Value
-0.9
-2.3
-3.4
Growth
+3.6
+2.2
+2.4
Risk
-0.7
+1.3
-2.7
Yield Dynamics
+2.8
+2.0
-0.3
Composite Bond-Cash
+3.9
+3.2
+2.5
UK
+2.7
+3.5
-3.9
+1.4
+3.5
Aus
-3.9
+2.3
-0.9
+2.2
+2.9
Can
-3.6
+3.1
-4.8
+2.0
+1.6
Swi
-2.5
+1.6
-0.4
-1.4
+3.0
Bond-Cash Sub-System: Signals' change from last month

US
Jap
Eur
Value
-0.5
-0.3
-0.2
Growth
-0.2
-0.3
-0.3
Risk
+1.4
-0.8
-0.6
Yield Dynamics
+5.7
+3.5
+1.5
Composite Bond-Cash
+0.7
+0.3
-0.3
UK
+0.1
-0.2
-0.9
+3.8
+0.3
Aus
+0.7
-0.1
-0.9
+5.8
+2.4
Can
+0.0
-0.3
-0.9
+5.8
+1.7
Swi
+1.4
-0.8
+3.9
+1.3
+0.6
Bond-Cash Sub-System: Signals' weights

US
Jap
Value
49%
33%
Growth
33%
29%
Risk
0%
9%
Yield Dynamics
18%
29%
UK
30%
57%
0%
13%
Aus
8%
41%
21%
29%
Can
40%
39%
7%
14%
Swi
25%
42%
13%
19%
Eur
34%
66%
0%
0%
Positive (negative) signals recommend long (short) duration
Q.M.S Advisors
Page 15
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Bond-Bond Signals Contrib. By Type

Bond-Bond Sub-System: Current Signal Ranks (1 = Best)

US
Jap
Eur
Yield Dynamics
1
6
3
Value
4
1
7
Composite Bond-Bond
1
5
6
UK
2
6
4
Aus
5
2
3
Can
4
3
2
Swi
7
5
7
Bond-Bond Sub-System: Last Month's Signal Ranks

US
Jap
Eur
Yield Dynamics
1
7
3
2
1
7
Value
Composite Bond-Bond
1
4
7
UK
2
4
2
Aus
6
6
6
Can
4
3
3
Swi
5
5
5
Q.M.S Advisors
Page 16
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Bond-Stock Signals Contrib. By Type

Stock-Bond Sub-System: Signals on scale from -5 to +5
US
Jap
Eur
Value
-4.1
-2.7
-3.1
Business Cycles
+3.6
+3.6
+3.7
Composite Stock-Bond
-2.5
-4.3
-4.0
UK
-3.8
+4.1
-4.6
Aus
-2.3
+3.7
-3.5
Can
-3.7
+3.7
-3.4
Swi
-3.5
+3.6
-2.9
Stock-Bond Sub-System: Signals' Change from Last Month

US
Jap
Eur
Value
-0.2
-0.1
+0.3
Business Cycles
+0.0
-0.1
+0.0
Composite Stock-Bond
+0.1
+0.0
-0.2
UK
+0.0
+0.0
-0.2
Aus
-0.6
+0.0
-0.0
Can
+0.0
+0.0
-1.0
Swi
-0.2
+0.0
-0.2
Aus
0.6
0.0
Can
0.6
0.0
Swi
0.5
0.0
Stock-Bond Sub-System: Signals' Confidence Level (1 = "Normal")

US
Jap
Eur
UK
Value
0.7
0.4
0.7
2.3
Business Cycles
0.0
0.0
0.0
0.0
Positive (negative) signals recommend to overweight (underweight) Stocks against Bonds
Q.M.S Advisors
Page 17
Pairwise
Views
Signals
Blending
Portfolio
Constru.
Stock-Stock Signals Contrib. By Type

Stock-Stock Sub-System: Current Signal Ranks (1 = Best)
US
Jap
Eur
UK
Value
5
8
2
3
Momentum
4
6
3
2
1
9
4
2
Implied Volatility
Energy Prices
7
3
4
5
Business Cycles
5
8
9
3
Composite Stock-Stock
2
3
4
5
Aus
9
3
3
6
3
6
Can
7
4
8
9
6
7
Swi
4
6
5
8
7
7
HK
1
9
7
1
1
2
EMF
6
8
6
2
3
9
Stock-Stock Sub-System: Last Month's Signal Ranks

US
Jap
Eur
Value
4
8
2
Momentum
5
7
2
Implied Volatility
2
9
3
Energy Prices
7
2
2
Business Cycles
5
6
9
Composite Stock-Stock
2
9
3
Aus
9
2
6
8
3
7
Can
7
4
7
9
8
7
Swi
5
5
4
6
7
6
HK
1
9
8
3
1
2
EMF
6
8
5
3
3
9
Q.M.S Advisors
UK
3
3
1
5
3
4
Page 18
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Pairwise Views
Process
qCIO is based on the sequential analysis of all expected returns
and standard error of all asset pairs for each sub-system
qCIO is designed so as to ensure an optimal and robust dynamic
modeling of all pairs of assets considered by utilizing advanced
Bayesian methodologies
For each of the five sub-systems, we obtain:
The expected excess return for every pair of assets
The expected risk for every pair of assets
The evolution of the weights for each signal
In total 92 pairs of assets are systematically dynamically modeled

and analyzed
Q.M.S Advisors
Page 19
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Blending
Aggregation and Apportioning of Views
Currency System
USD vs JPY
USD vs EUR
EUR vs JPY
etc.
Stock-Bond System
US Stocks vs Bonds
Japan Stocks vs Bonds
Eurozone Stocks vs Bonds
etc
Blending
Stock-Stock System
US vs Japan
US vs Eurozone
Japan vs Eurozone
etc.
Expected Returns
and Standard Errors
Bond-Bond System
US vs Japan
US vs Eurozone
Japan vs Eurozone
etc.
Q.M.S Advisors
Bond-Cash System
US Bonds vs Cash
Japan Bonds vs Cash
Euro Bonds vs Cash
etc.
Page 20
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Blending
Bayesian blending mechanism to obtain expected returns based on:
Prior expectations: Excess returns are set to 0 in the absence of views, their
covariance is estimated historically using exponential decay
Views: Expected excess returns obtained from the Bayesian regression
Confidence of the views
The expected returns can be interpreted as a weighted average of the

equilibrium prior and the tactical views. The weights are determined by
the relative confidence that we have in the views and the risk of the
assets
Expression of the pairwise views:
1%
eS
1 1 0 E ( RStocks )
0 1 1 E ( R
= 0.5% + e
)
Bonds
b
1 0 0 E (Cash) 0.75% ec
P
Q.M.S Advisors
E(ret) = V + e
Stocks outperform bonds by 1%

Bonds outperform cash by 0.5%
Stocks will generate a 0.75% return
=diag(cov(e))
Page 21
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Blending
The conditional expected returns of each asset class is expressed as:
E(R) = [ ( )-1 + PT -1 P ] -1 . [ ( )-1 + PT -1 V ]
With:
the vector of equilibrium returns (set to 0)
the covariance of returns (based on historical data)
P the matrix of views
the covariance of the views
a calibration factor (set to 0.02, no consensus on its value in the literature)
Limiting cases:
P=0: No views
BL returns= Equilibrium returns (0)
Inv(): No forecast error
BL returns = Views
Q.M.S Advisors
Page 22
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Blending: Systems Interdependence

Excess Returns Are Derived From Every Sub-Systems
The expected excess return of each asset is influenced by views in
all five sub-systems. Some of these influences are not surprising:
The expected returns of stocks are heavily influenced by views in the stockstock and stock-bond sub-systems
The expected returns of bonds are heavily influenced by views in the bondbond and bond-cash sub-systems
The expected returns of currencies are heavily influenced by views in the FX
sub-system
But because of correlation among assets, a sub-system can

influence the expected return of assets that are not directly
involved in its own views. For example:
The stock-stock sub-system is contributing to higher expected returns for all
currencies against the US dollar. This is because the stock-stock sub-system
expects the US stock market to out-perform European stock markets in
currency-hedged terms, and this is associated with a weaker dollar.
Q.M.S Advisors
Page 23
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Blending: Systems Interdependence

Excess Returns Are Derived From Every Sub-Systems
Sub-Systems' contributions to expected excess returns of stock markets over cash, % p.a.
US
Jap
Eur
UK
Aus
Can
Swi
0.8%
-1.8%
-0.2%
-0.1%
1.0%
0.5%
-1.4%
FX Sub-System
1.9%
1.0%
1.9%
1.8%
1.7%
1.5%
1.6%
Bond-Cash Sub-System
1.0%
0.2%
-0.1%
0.3%
0.6%
0.6%
0.2%
Bond-Bond Sub-System
-2.9%
-2.5%
-3.3%
-3.4%
-3.1%
-2.6%
-2.9%
Stock-Bond Sub-System
1.2%
0.7%
0.8%
0.5%
0.2%
-0.9%
-0.9%
Stock-Stock Sub-System
Expected Stock Excess Return
2.0%
-2.3%
-0.9%
-0.9%
0.3%
-0.8%
-3.4%
* All stock markets except HK & EMF are currency-hedged into US dollars
HK
-0.7%
2.5%
0.4%
-3.3%
4.0%
2.9%
EMF
0.1%
1.6%
0.5%
-2.7%
-2.2%
-2.7%
Sub-Systems' contributions to expected excess returns of bond markets over cash, % p.a.
US
Jap
Eur
UK
Aus
Can
Swi
FX Sub-System
-0.3%
-0.2%
-0.3%
-0.2%
0.1%
-0.3%
0.1%
1.9%
1.5%
1.8%
1.9%
2.1%
1.8%
1.5%
1.3%
0.0%
-0.2%
0.3%
0.6%
0.9%
-0.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
0.1%
0.2%
0.2%
0.1%
0.1%
0.1%
Expected Bond Excess Return
3.1%
1.6%
1.6%
2.1%
2.9%
2.5%
1.3%
* All bond markets are currency-hedged into US dollars
Sub-Systems' contributions to expected excess returns of currencies over USD, % p.a.
JPY
EUR
GBP
AUD
CAD
FX Sub-System
15.9%
2.5%
1.3%
-0.9%
-0.2%
0.0%
-0.1%
0.0%
-0.1%
0.1%
-0.1%
0.0%
0.1%
-0.1%
0.1%
0.0%
0.2%
0.0%
0.0%
0.0%
-0.1%
-0.1%
0.0%
-0.2%
-0.1%
15.8%
2.4%
1.4%
-1.2%
-0.1%
Expected Currency Excess Return
Q.M.S Advisors
CHF
-0.4%
0.0%
0.0%
0.2%
-0.1%
-0.3%
Page 24
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Model Tradeoff between return and risk is made
The objective function is to maximize single-period expected
return subject to tracking error target
Flexible control of turnover can be achieved by means of a
transaction penalty parameter (factor is highest in the first half of
the month), and other methods
Round-trip transaction costs assumptions are 12 bp, 4 bp, and 8
bp for stocks, bonds and FX
Portfolios with different objectives and constraints are
constructed using the same set of expected return, ensuring
information consistency
Q.M.S Advisors
Page 25
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Optimal Weights Targeting 5% Risk p.a.
Expected Information Ratio
Current
2.28
Five-year average
2.47
* All bond markets and all stock market except Hong Kong and Emerging Markets are currency-hedged into US dollars
Q.M.S Advisors
Page 26
Signals
Pairwise
Views
Blending
Portfolio
Constru.
Portfolio Backtests
Unrestricted Systematic Global Macro Program
Realized Performance - 15 years
Annual Alpha =
6.30%
Tracking Error =
7.77%
Information Ratio =
0.81
The unrestricted program is the most accurate reflection of the models views.
Where a benchmark is present, no short-selling or leverage is permitted.
Q.M.S Advisors
Page 27
Defining Features
qCIO Systematic Global Macro Program
qCIO Global Macro and GTAA Strategies are global, multi asset class
strategies, that seek to add alpha through advanced quantitative
investment processes. Potential investment opportunities are
identified via rigorous and disciplined approaches based on
combinations of economic and financial factors.
Generally, investment managers assemble their portfolios based
on their long-term views of the performance of a single asset class,
usually employing a five-year investment horizon. This traditional
approach doesnt take into account short-term macro events that
have the potential to move the market. While these events take
place, the resulting mis-valuations provide the opportunity to
capture short-term incremental returns that are complementary to
the long-term holdings of a traditional portfolio.
Q.M.S Advisors
Page 28
Defining Features
qCIO seeks to capitalize on numerous sources of alpha by identifying
the markets constantly evolving economic conditions and taking long
and short positions in global equity, bond, credit, commodity and
currency futures markets.
qCIO views these asset classes on a differential basis, and in
accordance with an array of macro-economic events in a number of
different geographic markets.
qCIO seeks to generate absolute return that has insignificant to very
low correlation to a portfolios traditional asset classes, and allow
investors to add alpha to their portfolios by exploring short-term
sources of return while broadening their investment opportunity set
from domestic markets to global markets, and from a single asset class
to multiple asset classes.
Q.M.S Advisors
Page 29
Defining Features
Diversification across signals
Relying on one type of strategy is likely to fail as a variety of signals drive
returns and as their correlation with returns varies over time. In contrast,
the qCIO process analyse markets methodically and focuses on a wide
array of market signals to identify opportunities.
These signals are grouped into five broad investment themes:
equilibrium, value, price dynamics, growth, and risk/sentiment that
are consistent with economic intuition and are retained on the basis
of their predictive power.
In accordance with this analysis, opportunities for alpha can be grouped
under two broad assumptions:
Shorter term momentum for the risk and sentiment indicators, and
for price dynamics signals
Mean reversion for economic indicators (e.g. growth, valuation, and
carry)
Altogether multiple market views and diverse signals are expected to
indicate where any target market stands in relation to its fair value or in
relation to other markets.
Q.M.S Advisors
Page 30

qCIO Global Macro Hedge Fund Strategy - November 2014

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qCIO

Global Macro Hedge Fund Strategy

Av. de la Gare, 1 | 1003, Lausanne | CH

Quantitative Global Macro

Relative Tactical positions are formulated on an Absolute Return basis

Across all sub-systems

Within each sub-system

Common Signals And Returns

7 iterations of the model

US Bonds vs. US cash, Japanese Bonds vs Japanese Cash, etc.

Within Asset Classes

No constant (premium) is included as there is no rationale as to why stock markets

Sequential Derivation of Direction and Confidence

FX Signals Contribution By Type

FX Sub-System: Last Week's Signal Ranks

FX Sub-System: Signals' Weights

Cash-Bond Signals Contrib. By Type

Bond-Cash Sub-System: Signals' change from last month

Bond-Cash Sub-System: Signals' weights

Positive (negative) signals recommend long (short) duration

Bond-Bond Signals Contrib. By Type

Bond-Bond Sub-System: Current Signal Ranks (1 = Best)

Bond-Bond Sub-System: Last Month's Signal Ranks

Bond-Stock Signals Contrib. By Type

Stock-Bond Sub-System: Signals' Change from Last Month

Stock-Bond Sub-System: Signals' Confidence Level (1 = "Normal")

Positive (negative) signals recommend to overweight (underweight) Stocks against Bonds

Stock-Stock Signals Contrib. By Type

Stock-Stock Sub-System: Last Month's Signal Ranks

In total 92 pairs of assets are systematically dynamically modeled

The expected returns can be interpreted as a weighted average of the

Stocks outperform bonds by 1%

Blending: Systems Interdependence

But because of correlation among assets, a sub-system can

Blending: Systems Interdependence

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