Macro Investment Business Plan

Roy Lennox

Lee Sperling

Sundeep Agrawal

Strategy

Macro trading is an investment strategy that is designed to take advantage of structural imbalances in global asset markets caused by economic, financial, social or political factors. On a tactical level it utilizes a pre-determined measure of risk to gain maximum leverage in asymmetric investment opportunities. Based on fundamentals, it also utilizes technicals to identify potential opportunities and set optimal risk parameters. The initial step in macro trading is to develop an investment framework that not only captures current investment themes, but also assesses the potential of other factors to impact future investment opportunities. Once a potential opportunity is identified, we utilize both our internal and external information networks to appraise it and decide if deeper analysis is warranted. The investment process includes a rigorous risk and a reward analysis, always aiming for asymmetric opportunities. Thereafter, we comprehensively analyze the underlying fundamentals driving the opportunity and formulate the best way to implement the investment idea in the market.

Team Composition

Mr. Lennox is the Senior Portfolio Manager of the group. Based on his experience and long-term track record, he will provide the “strategic vision”, while also being the primary portfolio decision maker. Mr. Sperling will contribute to the idea generating process and have direct responsibility for the logistical details of the portfolio including execution, monitoring risk, and managing sell-side relationships. Mr. Agrawal will be responsible for macro research and analysis and will also utilize his unique experience in credit to create innovative ways of expressing macro-based opportunities.

Investable Universe

We almost exclusively trade assts that are very liquid. When liquidity constraints exist we size our positions accordingly such that our size is a very small percentage of total daily volume. In most cases our portfolio can be liquidated within 24 hours if not sooner.

·  Developed Market Currencies (spot, forward, and vanilla option based): Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollars, Australian Dollars, New Zealand Dollars, Norwegian Krone, Swedish Krona

·  Emerging Market Currencies (spot, forward, and option based): Singapore Dollar, Korean Won, Taiwan Dollar, Thai Baht, Indonesian Rupiah, Indian Rupee, Malaysian Ringgit, Chinese Yuan, Brazilian Real, Mexican Peso, Polish Zloty, Russian Ruble, Israeli Shekel, Turkish Lira, South African Rand

·  Sovereign Debt (cash bonds, futures, and vanilla options): United States, Canada, Japan, United Kingdom, Australia, the Eurozone, and Emerging markets

·  Equities (index based futures and occasional single name stocks): United States, Europe, Latin America, Asia

·  Credit (liquid index products and credit default swaps): United States, Canada, Japan, United Kingdom, Australia, the Eurozone, and Emerging markets

·  Commodities (futures): Energy, precious metals, base metals and various agricultural products

Risk and Position Sizing

One formidable advantage a discretionary trader has over more systematic approaches is the recognition that all “investments or trades are not created equal”. Three basic criteria dictate position size:

  1. Level of conviction - Highest conviction trades are those where fundamentals, technicals and market dynamics are aligned. If this is the case, we should be risking 1% of AUM.
  2. Level of quantifiable discrete risk - The distance to the stop is the key metric in establishing position size. The stop should be set at a level whereby simple random volatility will not take one out of the position. Obviously the more volatile the asset, the wider the stop and the smaller the position. When valuations are attractive, we will buy options in order to position ourselves long gamma and improve the risk reward ratio.
  3. Correlation with the rest of the portfolio - A high correlation to other positions should result in a smaller position. A truly idiosyncratic trade or one that diversifies the portfolio argues for a larger position.

As already mentioned, the whole concept of macro trading can be defined as getting maximum leverage on a discrete measure of quantifiable risk. Therefore, it follows that risk management is the most important aspect of trading and a disciplined approach to downside risk is mandatory. On a trade-by-trade basis we adhere to a strict stop-loss discipline. This is particularly important for a macro investment approach and relates back to building position size as conviction grows. If a drawdown of the entire portfolio approaches 10% all positions are cut in half. The portfolio's positions will be completely closed down at a 15% drawdown for a period of time so that current market views can be reassessed.

From a volatility perspective, we are comfortable with a 10-13% annual volatility while targeting a 15-20% return (assuming a conservative Sharpe ratio of 1.5). However, if an extraordinary opportunity arises, we would elevate our risk and thus our potential return. Furthermore, our views could also be deployed in the organization’s larger portfolio. Conversely we are comfortable running much lower levels of risk during periods when the opportunity set is less compelling.

Just as the level of total portfolio risk will fluctuate, the relative levels of risk between asset groups within it will vary based on opportunity. Therefore, defining risk in particular asset classes must be flexible. These are the ranges we expect under normal conditions.

% of Portfolio Risk (VAR)

Currencies (developed and emerging) 20 - 60%

Government Debt (US and International) 20 - 50%

Equity Derivatives 10 – 30%

Credit 10 – 20%

Commodities 0 – 20%

Research

Although our research and decision making is driven in-house, we have developed through experience a few key relationships that we believe add unique knowledge and insights. The information they provide may also be valuable to the organization as a whole. Included are a small number of high-level consultants that have limited client lists and based on our long-standing relationship may accept reduced fees. Consultants marked with an asterisk are particularly valuable.

·  Global:

o  * James Aitken – Global analyst currently focused on Europe whose approach is to do a detailed deep dive analysis from a perspective of a financial institution looking for investment opportunities

·  Europe:

o  Bernard Connolly – Specialist on the financial and political systems within Europe.

·  Asia:

o  *Rodney Jones – Asian economist currently living in Beijing. An independent critical thinker.

·  Federal Reserve / Central Bank Specialist:

o  Lawrence Lindsey or Larry Meyers

·  Capital Hill / Political Specialist:

o  Nicolas Checa – McLarty Associates – A specialist in global politics, but has contacts at the Federal Reserve as well.

o  Roy also has a long-standing relationship with and sits on the advisory board of the American Enterprise Institute, (a Washington D.C. based think tank), and has access to all the scholars there.

On the ground research is critical for macro investing. The obvious example of this would include visits to foreign central banks and finance ministries, but discussions with local banks, politicians, journalists, and academics can also be very valuable. One of the benefits of thirty years of experience is a worldwide network of contacts.

Biographies

Roy Lennox is currently a Founding Member and Senior Portfolio Manager of Arrowhawk Global Opportunities. He was a Founder and Senior Managing Director at Caxton Associates, which he joined in 1983 from Commodities Corporation, where he was Senior Vice President and Trader. Mr. Lennox has a 27-year track record trading global macro markets that include foreign exchange, fixed income, commodities, emerging markets, and equity derivatives. While at Caxton Mr. Lennox also had a number of senior management responsibilities. In addition to guiding and managing Caxton’s trading floor, he identified and mentored a number of Caxton traders who became successful senior portfolio managers at Caxton and elsewhere. While at Commodities Corporation from 1980 to 1983, Mr. Lennox built its currency desk and developed the first systematic approach to profiting from “carry” opportunities in foreign exchange portfolios. In 1993 and 1994, Mr. Lennox managed his own hedge fund, Kiloran, where Caxton was the first and largest investor. Mr. Lennox has a B.A. in Political Science and an M.A. in History from Rutgers University. He received a PhD in History in 1977 and an MBA in 1980, both from Columbia University. For a number of years Mr. Lennox was an Adjunct Associate Professor at Columbia Business School where he taught courses on futures and other derivative markets.

Lee Sperling is the Head Trader for Arrowhawk Global Opportunities. Mr. Sperling is responsible for all trading as well as performing various risk control functions. With seventeen years of trading experience across an array of asset classes, Mr. Sperling is driven by fundamental analysis and is well versed in trading listed, OTC, and derivative instruments. Prior to Arrowhawk, Mr. Sperling spent 3 years at Elliott Associates where he worked on the Global Energy Fund with similar responsibilities. From 1997 to 2005, Mr. Sperling was a trader at Caxton Associates eventually running the Asian Trading desk before being selected to join a Senior PM to run a Global Macro Fund. While at Caxton, Mr. Sperling developed a close working relationship with Mr. Lennox. Mr. Sperling began his career at Commodities Corporation in 1994 on the foreign exchange trading desk. Mr. Sperling graduated from Lehigh University in 1994 with a Bachelor of Science in Finance within the School of Business and Economics.

Sundeep Agrawal is the Portfolio Manager for Credit Opportunities within Arrowhawk Global Opportunities. Prior to July1, 2010, Mr. Agrawal was a Senior Analyst for Arrowhawk’s Distressed Special Situations strategy since its launch in July 2009. Prior to joining Arrowhawk, Mr. Agrawal was a senior member of the investment team at Strategic Value Partners LLC, a distressed credit hedge fund where he was responsible for distressed credit and structured product investments. From 2006 to 2007, Mr. Agrawal was a Portfolio Manager at Vector Capital Management, a structured products asset manager that he co-founded. From 2005-2006, Mr. Agrawal was a Senior Analyst at Highland Capital Management, a $40 Billion High Yield asset manager. From 2003 to 2005, Mr. Agrawal was an Investment Analyst at General Motors Asset Management focusing on distressed credit and structured products investments. From 1997 to 2002, Mr. Agrawal held various positions at Lehman Brothers and Imagine Software LLC. Mr. Agrawal received a B.E. in Electrical Engineering from the Delhi Institute of Technology in 1992, an M.S. in Systems Engineering from The University of Texas at Austin in 1996, and an MBA in Finance from New York University’s Stern School of Business in 2003.