V2 - Back Testing Results

Below are given back testing results of V2, generated by the back testing software. These results should be considered as extrapolation into the past of V2 - Volatility Trading Program, which started live trading on December 1, 2015. Performance fees (20% of new net profit above high water mark) are not deducted from back testing results. To see actual trading results, please go to the Performance page.

Back testing results can be found in this spreadsheet. Results do take into account bid/ask spreads and negative interest on borrowed equity (sold short).

- The back testing history goes back 60 months (the entire available history of the traded instruments was used), and the results for this strategy are very promising. The variability of returns is low and the Sharpe Ratio is excellent. The strategy is extremely robust i.e. relatively insensitive to parameter changes (it is not a curve fitted, or over optimized system), which usually anticipates excellent performance in forward trading, following the back testing period.

- Transaction costs are very low (only 1.8% of net asset value per annum), relative to average annualized rate of return (around 10% per annum). These calculations are based on a $100,000 test account. In larger accounts, the efficiency should be somewhat better.

- The strategy trades liquid instruments (VXX and XIV ETNs) and has moderate capacity. The unavailability to sell short stock at certain times was not taken into account.

- The strategy is minimally affected by price slippage, as it trades liquid trading instruments and makes relatively small position adjustments during the trading day. Hence, the actual trading results are very close to hypothetical results. See "Transaction costs" above.

- V2 has relatively shallow drawdowns and, due to the excellent profitability in back testing, the strategy should recovers relatively fast.

- Back testing results do take into account the interest paid on "hard to borrow" shares. As of November 2015 the average interest on open positions was around 4.4% per year at Interactive Brokers.

- Larger annualized returns can be obtained by employing portfolio margin and additional leverage in accounts funded in excess of $100,000 (with Interactive Brokers).

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

VAMI

2010

2.21%

1,022.1

2011

0.88%

0.89%

(0.44%)

2.06%

0.34%

0.15%

(0.48%)

0.64%

(1.00%)

1.93%

(0.13%)

1.33%

6.29%

1,086.4

2012

1.91%

1.21%

3.71%

0.50%

(1.00%)

1.70%

2.03%

1.13%

1.68%

0.48%

2.48%

2.81%

20.22%

1,306.1

2013

2.34%

0.55%

1.53%

3.33%

(0.08%)

(1.06%)

2.50%

(1.21%)

0.99%

1.09%

0.74%

0.59%

11.80%

1,460.3

2014

(1.24%)

1.16%

1.01%

(0.01%)

1.36%

0.52%

(1.12%)

0.93%

(0.68%)

2.71%

0.50%

0.28%

5.48%

1,540.4

2015

(0.48%)

2.09%

0.46%

1.34%

0.74%

0.08%

2.13%

(2.40%)

(0.02%)

3.78%

(0.36%)

7.47%

1,655.4

2. Performance Statistics, Based on Back Testing Results (Before Performance Fees)

Strategy Returns (Before Performance Fees)
Testing period (60 months)	Dec/2010 - Nov/2015
Net profit on fixed capital without/with monthly profit reinvesting	51.1% / 65.5%
Compound average annualized ROR	10.61%
VAMI - Hypothetical growth of $1,000, compounded monthly (management fees not deducted)	1,655.4
Monthly Profit Factor (Profit to Loss Ratio); (sum of positive RORs) ÷ (sum of negative RORs)	5.36
# Profitable months / average positive ROR	44 / 1.43%
# Losing months / average negative ROR	16 / (0.73%)
Kurtosis of monthly RORs	(0.11)
Skewness of monthly RORs	0.06
% Profitable months	73.3%
Ratio avg. positive / avg. negative monthly ROR (Gain to Loss Ratio)	1.95
Max. # of consecutive profitable / losing months	11 / 2
Maximum / minimum monthly ROR	3.78% / (2.40%)
Maximum / minimum daily ROR	4.53% / (2.42%)
Maximum / minimum 5-day rolling ROR	5.76% / (3.75%)

Risk Measures
Annualized standard deviation of monthly RORs	4.50%
Annualized d ownside deviation (MAR = RF return of 1% per annum)	2.20%
Sharpe Ratio, annualized (RF rate of return 1%)	2.14
Sortino Ratio, annualized (below RF ret. 1%)	4.36
Calmar Ratio (ratio compound average annual ROR to worst intra month drawdown)	4.10
Efficiency Ratio	2.36
Tracking error, relative to the S&P 500 Index, annualized	9.14%
Historic 5-day Value at Risk (VaR); (for 95% and 99% confidence levels)	(1.02%) / (1.72%)
Alpha relative to the S&P 500 Index, annualized	6.88%
Beta & correlation coefficient, relative to the S&P 500 Index	0.28 / 0.73
Jensen's Alpha relative to the S&P 500 Index, annualized	6.57%
Active premium, relative to the S&P 500 Index, annualized	(1.39%)
Information Ratio, relative to the S&P 500 Index	(0.20)
Worst peak-to-valey, monthly drawdown depth / duration	(2.59%) / 2 months
Worst peak-to-valley, daily drawdown	(3.95%)
Longest recovery period	66 days

Basic Strategy Characteristics
Strategy name	V2
Type of trading	VIX ETF Arbitrage
Portfolio composition	VXX and XIV ETNs
Margin to equity ratio	max 100%
Maximum strategy leverage	100% short VXX 100% short XIV
How generated	Back testing - hypothetical
Start of live trading in the Managed Account Program:	December 1, 2015

Turnover / Cost Parameters
Average total, long and short positions value (VIX neutral), relative to NAV	180%
Average daily portfolio turnover (daily traded positions value as a percentage of NAV)	2.9%
Annual turnover ratio	7.4
Average annual transaction costs - bid/ask spreads and commissions and negative interest (deducted from annual ROR)	6% of NAV per annum
Average transaction bid/ask spread and commission cost, as a fraction of the transaction value (already taken into account)	0.06%

More back testing results, for the three strategies (V1, V2, V4) combined are available upon request.

PLEASE ANALYZE AND THOROUGHLY UNDERSTAND THE RISK / DRAWDOWN PARAMETERS ABOVE AND THE DRAWDOWN CHART BELOW BEFORE YOU DECIDE TO INVEST IN THE PROGRAM. AS WITH ANY TRADING PROGRAM, THERE IS NO GUARANTEE THE SYSTEM WILL NOT EXCEED THE WORST DRAWDOWN FROM THE PAST. WE DO NOT RECOMMEND INVESTING MORE THAN 1/3 OF YOUR TOTAL INVESTMENT PORTFOLIO IN ANY PARTICULAR PROGRAM, INCLUDING V1D - VOLATILITY TRADING PROGRAM.

3. Performance Graphs

Monthly Rates of Return (ROR, before management fees)

Monthly Strategy VAMI vs. S&P 500 Index

Daily Strategy VAMI vs. S&P 500 Index

Intra-Month Drawdown

Compounding is an efficient method for increasing your account equity exponentially, by reinvesting the profit (see the VAMI charts above and try this Financial Calculator). You can see these formulas for ROR calculations and compounding.

The above tables and charts document V2's historical hypothetical performance based on back testing results. To see actual trading results, please go to the Performance page.

Please note that performance results reported are before performance fees, which decrease returns. Interest on open positions is not taken into account in hypothetical results. There may also be slight differences in profit/loss on different trading platforms.

Better results (smaller drawdown and better Sharpe and Sortino Ratio) can be obtained by trading the V1, V2 and V4 Volatility Trading Programs combined.

The three Volatility Trading Programs can be further combined with our four currency trading programs (FX Quant 11, FX Index Arb, FX Basket Quant) - see this 6-strategy composite back testing report.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PLATFORMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

THE RISK OF LOSS IN TRADING EQUITIES AND ETFS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION AND INVESTMENT OBJECTIVES. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER. TRADING EQUITIES IS SPECULATIVE AND MAY INVOLVE THE LOSS OF PRINCIPAL; THEREFORE, FUNDS PLACED UNDER MANAGEMENT SHOULD BE RISK CAPITAL FUNDS THAT IF LOST WILL NOT SIGNIFICANTLY AFFECT ONE'S PERSONAL WELL BEING. THIS IS NOT A SOLICITATION TO INVEST AND YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTION. PLEASE SEE THE COMPLETE RISK DISCLOSURE.