Crisis Correlation:

The Hidden Risk

of Diversification

Rob Hanna
Co-Founder and
VP of Research

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Information contained in InvestiQuant webinars is provided for educational purposes only. Under no circumstances is it to be used or considered as
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of publication, we make no representation as to the accuracy or completeness of any data, statistics, studies, or opinions expressed and it should not be
relied upon as such. InvestiQuant, Inc, its employees, owners, and/or affiliates may have positions or other interests in securities (including derivatives)
directly or indirectly which are the subject of information shown in this presentation or on the InvestiQuant website. Neither InvestiQuant, nor any officer or
employee of InvestiQuant, accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents.

Past performance is not necessarily indicative of future results. Trading futures, options on futures, and retail off-exchange foreign currency transactions
involves substantial risk of loss and is not suitable for all investors.

Commodity Futures Trading Commission (CFTC) Rule 4.41 HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH
ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE
SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY
ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO
WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY
AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY
SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF
WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

TESTIMONIALS SHOWN ON THE INVESTIQUANT WEBSITE AND REFERENCED FROM TIME-TO-TIME ARE FROM SELECT CUSTOMERS. THEIR EXPERIENCES MAY
NOT BE TYPICAL OF WHAT YOU CAN EXPECT TO ACHIEVE, AS RESULTS MAY VARY. CLAIMS CONTAINED WITHIN TESTIMONIALS HAVE NOT BEEN VERIFIED.
CUSTOMERS WERE NOT PAID OR COMPENSATED IN ANY WAY FOR THEIR STATEMENTS.

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 Agenda
● Let’s Talk Equity Curves
● Diversification - Benefits & Shortfalls
● Crisis Correlation Risk
● Success During Stress
● Introduction to InvestiQuant’s Solutions
● Q&A

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 About Rob Hanna
● Began trading in 1998
● Established Hanna Capital Management in 2001
● Created first quant trading system in 2004
● Have written and created research for TradingMarkets,
Quantifiable Edges, Overnight Edges & InvestiQuant
Rob Hanna
Co-Founder and VP of Research
● Co-founder & VP of Research at InvestiQuant, 2014
InvestiQuant, Inc.

If you have any questions, feel free to email me at Rob@InvestiQuant.com.

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 The Ideal Equity Curve

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 Definition of a Drawdown

What is a “Drawdown”?

A drawdown is the peak-to-trough decline during a

specific recorded period of an investment, fund or
commodity. A drawdown is usually quoted as the
percentage loss between the peak and the
subsequent trough.

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 Maximum Drawdown
E
B D

Dr
Maximum drawdown is

aw
the maximum loss from

do
a peak to a trough of a

wn
portfolio, before a new
peak is attained.
C

It is shown visually here

between point B and C.
A

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 Drawdown/Recovery Ramifications
Drawdown Amount % Return Needed to Recover

5% 5.3%

10% 11.1%

25% 33.3%

40% 66.7%

50% 100.0%

75% 300.0%

90% 900.0%

Large drawdowns can be extremely difficult to recover from and may take a long time.

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 Annual Drawdowns of
Diversified Portfolio

* Assumes equal weighting of all six asset groups within the portfolio to begin each year.

Diversification among asset classes is often effective in “normal” markets.

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 S&P 500 (1995-2009)

Two BIG corrections in 2001 and 2008 wiped out more than 50% of the market’s value.

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 2008 Returns — Markets Crashing

This demonstrates something we call “Crisis Correlation Risk”.

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 2008 Diversified Portfolio Drawdown

* Assumes equal weighting of all six asset groups within the portfolio to begin 2008.

In a crisis year, asset diversification fails to contain drawdown.

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 Major Market Bottom Dates

AGG — Investment Grade Bonds 10/10/08

GLD — Gold 11/12/08

SPY — S&P 500 03/06/09

JNK — Junk Bonds 03/09/09

EEM — Emerging Markets 11/20/08

IYR — Real Estate 03/06/09

All 6 asset groups realized their worst drawdowns and bottomed within a 5 month span.

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 Wealth Rotation vs. Destruction
Rotation (Normal Markets) Destruction (Market Crises)
● Normally, people buy the most ● Heavy losses during a crisis
appealing assets and sell the least cause “forced” selling. (Margin
appealing ones. calls, mortgage defaults, etc.)

● This causes rotation. Some asset ● Sell whatever is possible to

classes will do well — others will not. remain solvent.

● But overall productivity and ● This causes ALL asset classes

expansion of global wealth allows to lose value.
simple long-only diversification to
work. Underperforming assets are
cushioned by best performers.

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 As a Group, Managed Futures
Can Mitigate Crisis Correlation Risk

The magnitude and timing of the managed futures drawdown was completely different.

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 Market Stress Creates Opportunities

● Higher volatility increases both potential risk and potential reward.

● Crisis environments typically see sharp swings in both directions.

● Reactions during times of stress are often “overreactions”

— which often leads to overreaction in the opposite direction.

● Therefore, profits may be taken more quickly

— and these gains may be just as sizable.

● Shorter trading timeframes can help limit risk while maintaining

a high potential for reward.

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 Market Stress Creates Opportunities
Avg absolute gap % over period: 0.8%
Avg intraday range over period: 6.4%

The average intraday range 9/30/08 - 11/24/08

was > 2X the average monthly range for 2017.
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 Strategy Diversification
is Key During Times of Stress
Types of Strategy Diversification:
❏ Market Neutral
❏ Trend Following
❏ Mean Reversion
❏ Short-term / Swing
❏ Intraday
❏ Overnight

Properly diversified portfolios can help reduce

drawdowns and potentially protect capital better.

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 S&P 500 (1995-2009)

Two BIG corrections in 2001 and 2008 wiped out more than 50% of the market’s value.

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 S&P 500 Since 2009...

The S&P 500 is up more than 375% since its 2009 lows.

Is your portfolio prepared for crisis correlation risk?

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 ● InvestiQuant (iQ) is a company of experienced traders, market technicians,
innovative technologists and data scientists.

● Since 2008, iQ has provided unique diversification to self-directed investors

who seek alternative strategies for alpha generation and asset protection.

● We offer portfolios of automated strategies that can be activated to trade

tax-advantaged index and bond futures on your behalf with the oversight of
a licensed investment professional.

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 What Makes InvestiQuant Unique?
✓ The three co-founders have managed capital and operated automated trading
systems for more than 30 years collectively.

✓ Two of three Co-founders are West Point graduates.

✓ Member-owned by more than 30 employees and investors — who funded

InvestiQuant’s growth after using the company’s trading signals for years.

✓ The Director of Duke University’s Center for Quantitative Modeling is a client and
investor in the company and serves on the company’s Board of Directors.

InvestiQuant’s Automated Portfolios are based on edges and signals

that the founders, and many of its shareholders, have traded for years.

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 InvestiQuant’s Intraday Portfolios
Portfolio Name Strategies Markets Timeframe Required Capital**
iQ Core I ~ 20 Index & Bond Futures Intraday Only < $200,000
iQ Plus I ~ 50 Index & Bond Futures Intraday Only < $500,000
** Please consult your broker to determine the appropriate funding level for you and your account.

✓ Short-Term Focused. Target short-term price anomalies. Carry no overnight exposure.

✓ Unique Value. Designed to perform during all market cycles, especially sideways, bear and volatile markets.

✓ Advantage: Technology. All trades are fully automated and executed with built-in risk controls.

✓ Sophisticated and Adaptive. Unique blend of ensemble forecasting, pattern recognition and adaptive algorithms.

Many of InvestiQuant’s employees, founders, shareholders and members of its

Board of Directors, trade these exact portfolios in their accounts.

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 To Learn More About...
Enabling Your IB Account InvestiQuant’s Automated
with an InvestiQuant Portfolio: Portfolios:

Julio Beaton Scott Greenwell

Senior Vice President Executive Vice President
Institutional Sales & Trading, Gar Wood Securities InvestiQuant, Inc.
312.967.4604 512.632.6493
jbeaton@garwoodsecurities.net scott.greenwell@investiquant.com

Or, feel free to contact either Scott or Rob @investiquant.com

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 Attend Our Next Webinar

“An Introduction to
iQ’s Automated Portfolios”

Tuesday, December 19th

12:00 Noon ET

Register now at www.investiquant.com/1219webinar

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 Questions?
The floor is open...

Rob@InvestiQuant.com
Scott@InvestiQuant.com

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 Thanks for Attending
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 Interactive Brokers
in conjunction with
InvestiQuant
present:

Crisis Correlation:
The Hidden Risk of
Diversification

Rob Hanna
Co-founder & VP of Research
InvestiQuant, Inc.

December 7, 2017
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2
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3
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4
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(1) For additional information see www.interactivebrokers.com/info

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9
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10
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