QMS Advisors - Diversifying Concentrated Equity Portfolio Risk Exposure

Diversifying Portfolios With Concentrated Stock Exposure Hedging Client Specific Concentration Risks

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.

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Av. C.-F. Ramuz, 85 | 1009, Pully | CH tel: 078 922 08 77 | 021 711 40 89 e-mail: info@qmsadv.com website: www.qmsadv.com

Optimal Portfolio Allocation For Portfolios With Concentrated Risks Efficient Risk Mitigation Methodologies To help clients with concentrated equity positions achieve optimal portfolio diversification

TARGET

To devise asymmetric hedging solutions allowing our clients to reduce their exposure to concentrated stock positions; and to effectively reduce their portfolio level idiosyncratic risks

To porting our clientsâ&#x20AC;&#x2122; risk budgets to strategies offering maximum potential diversification from a total portfolio perspective.

Q.M.S Advisors

Page 1

Optimal Portfolio Allocation For Portfolios With Concentrated Risks Efficient Risk Mitigation Methodologies Objective

To diversify into alternative strategies, using a highly concentrated and volatile equity position as collateral Determine the most potent combination of alternative assets to introduce in the portfolio in order to provide the maximum possible diversification Determine the optimal joint leverage/collar strategy to minimize the likelihood of margin calls under cost constraints

Approach

Design quantitative models to analyze complex levered portfolios Build binomial term structure and option models to analyze clientsâ&#x20AC;&#x2122; potential risks of facing margin calls over multiple time horizons Design non-linear asset pricing models to assess the potential risks and cost impact of implementing collar strategies Assess the probability of margin calls over multiple time horizons and test the efficiency of the chosen collar structure

Q.M.S Advisors

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Optimal Portfolio Allocation For Portfolios With Concentrated Risks Optimal joint leverage/collar strategy to minimize the likelihood of margin calls Margin Calls At 30% Leverage Without Collars 0 0.00%

1 0.00% 0.00%

2

3

0.00%

4

5

0.00%

6 0.00%

7 0.00%

8 0.00%

9 0.00%

10 0.00%

11 0.00%

12 0.00%

Margin Calls At 35% Leverage Without Collars 13 0.00%

14 0.00%

15 0.00%

16 0.00%

17 0.00%

18 0.00%

19 0.00%

0.00%

0.00% 0.00%

0.00%

0.01%

0.00%

0.01%

0.03%

0.00%

0.02%

0.00%

0 .0 0 % 0 .0 0 %

0 .0 0 %

0 .0 0 % 0 .0 0 % 0 .0 0 %

0 .0 0 %

0 .0 0 % 0 .0 0 % 0 .0 0 %

0 .0 0 %

0 .0 0 % 0 .0 0 %

0 .0 0 %

0 .0 0 % 0 .0 0 % 0 .0 0 %

Margin Calls At 30% Leverage With Collars 0 0.00%

1 0.00% 0.00%

2 0.00%

3 0.00%

4

5

0.00%

6 0.00%

7 0.00%

8 0.00%

9 0.00%

10 0.00%

11 0.00%

0.00%

13 0.00%

14 0.00%

15 0.00%

16 0.00%

17 0.00%

18 0.00%

19 0.00%

20 0.00%

0.00%

0.01%

0.03%

0.00%

0.02%

0.00%

Cumulative Probability 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 %

Q.M.S Advisors

0.00%

2

3

0.00%

4 0.00%

5 0.00%

6 0.00%

7 0.00%

8 0.00%

9 0.00%

10 0.00%

11

12

0.00%

13 0.00%

14 0.00%

15

16

0.00%

17 0.00%

18 0.00%

19 0.00%

0.00%

0.78%

0.00% 0.39%

0.00%

1.76%

0.00%

0.20%

0.00%

0.98%

0.00%

2.69%

0.00%

0.10%

0.00%

0.54%

1.61%

3.49%

0.00%

0.29%

0.95%

2.22%

4.17%

0.00%

0.16%

0.56%

1.39%

2.78%

4.72%

0.00%

0.01%

0.09%

0.32%

0.85%

1.82%

3.27%

0.00%

0.05%

0.18%

0.52%

1.17%

2.22%

3.70%

0.00%

0.02%

0.10%

0.31%

0.74%

1.48%

0.00%

0.01%

0.06%

0.18%

0.46%

0.01%

0.00%

0.01%

0.03%

0.11%

0.00%

0.02%

0.00%

0.00% 0.00%

Cumulative Probability 0 .0 0 % 0 .0 0 %

0.00%

0.05%

0.02%

0 .0 0 %

20 0.00%

0 .0 0 %

0 .0 0 % 0 .0 0 % 0 .7 8 %

0 .3 9 %

1.9 5 %

1.0 7 % 3 .2 7 %

1.9 3 %

4 .6 1%

2 .8 7 % 5 .9 2 %

3 .8 4 %

7 .17 %

4 .8 1%

3 .18 % 5 .7 7 %

Margin Calls At 35% Leverage With Collars 12

0.00%

1 0.00%

0.00% 0.00%

Cumulative Probability

0 0.00%

0.00%

0 .0 0 %

20

0 .0 1% 0 .0 4 % 0 .0 2 %

0 0.00%

1

2

3

4

5

6

7

8

9

10

11

12

0.00%

14 0.00%

15 0.00%

16 0.00%

17 0.00%

18 0.00%

19 0.00%

20

0.00%

13

0.00%

0.10%

0.54%

1.61%

3.49%

0.00%

0.05%

0.29%

0.95%

2.22%

4.17%

6.67%

0.00%

0.02%

0.16%

0.56%

1.39%

2.78%

4.72%

7.08%

0.00%

0.01%

0.09%

0.32%

0.85%

1.82%

3.27%

5.18%

7.39%

0.01%

0.05%

0.18%

0.52%

1.17%

2.22%

3.70%

0.00%

0.02%

0.10%

0.31%

0.74%

1.48%

0.00%

0.01%

0.06%

0.18%

0.46%

0.01%

0.03%

0.11%

0.00%

0.02%

0.00%

Cumulative Probability 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 % 0 .0 0 %

0 .10 % 0 .5 9 %

1.9 3 %

4 .6 1% 2 .8 7 % 5 .9 2 % 10 .5 1%

7 .17 % 11.8 9 % 8 .3 5 % 13 .16 %

Page 3

Optimal Portfolio Allocation For Portfolios With Concentrated Risks Efficient Risk Mitigation Methodologies Conclusions

Hedge level on the equity collateral is determined by the amount of risks the client intends taking

Collars, when included in the debt covenants, help lower the probability of margin calls over the defined time horizon

Collars in a dynamic framework can provide inexpensive portfolio protection

Addition of hedge funds and other alternative investments to the clientâ&#x20AC;&#x2122;s portfolio helps reduce total portfolio risks while enhancing returns

Q.M.S Advisors

Page 4

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