BULLERO ALPHA STRATEGY August 2013. Overview We are launching an absolute return PMS product from September 2013 We are different - we construct a.

BULLERO ALPHA STRATEGY

August 2013

Overview

We are launching an absolute return PMS product from September 2013

We are different - we construct a portfolio with a blend of Market neutral alpha generating strategies Blue chips bought only at distress valuations – we believe the market may offer

such opportunities in the run up to the elections Our source of return is not market timing, or long-only investments

We view stringent risk management as a key driver to sustained performance in financial markets

Initial proprietary capital commitment to strategy from Bullero – INR 10 million

The team at Bullero Capital has over 45 years of combined experience in the Indian financial markets

History and vision

Bullero Capital is promoted by the Khandelwal family based out of New Delhi. The family has a rich history in the financial markets. The original family firm, Narayandas Khandelwal & Co was one of the founder members of the Calcutta Stock Exchange. The group took membership of the National Stock Exchange in 1995 under Archna Securities Pvt Ltd which extended till 2003. Since then, the shift had focused to maintaining a proprietary book and expanding exposure to real estate.

We intend on developing our asset management business via the Portfolio Management license and grow our AUM to about Rs 100 crore under the absolute return strategy gradually

The next step will be setting up of a closed AIF fund to trade across all asset classes – equities, currencies, commodities, fixed income – with potential for leverage.

Management philosophy

We are a fiduciary to our clients – client interests come first, always.

We seek to build relationships that are built on principles of trust, truthfulness and ethical conduct

We value truth and excellence above all traits – we need to know

We believe that the economy and markets are continuously changing.

We pride ourselves on being able to nimbly trade the markets, and strive to deliver superior risk-adjusted returns to our clients

Our attempt to deliver superior returns necessitates consistent, focused research to improve our methods, generate new ideas and work to identify regime changes in the markets and the economy

Organization chart

Tarun Khandelwal

Chairman

Varun Khandelwal

Chief Investment Officer

Sanchit Mehdiratta

Analyst

Shivani Lal

Analyst

SachinCompliance /

Accounts

Back-office Personnel

Archna Khandelwal

Marketing / Strategy

Rabia Sooch

Marketing / Strategy

Investment team

Varun Khandelwal is the principal officer at Bullero Capital. He has been responsible for managing the proprietary desk spanning equities, fixed income, real estate and options at Bullero since 2010. Bullero’s proprietary desk holds investment stocks and runs algorithmic strategies, statistical arbitrage and volatility trades expressed via options. He has extensively applied his expertise in statistically tested strategies to enhance investment returns.

Prior to joining Bullero, Varun worked at Oxus Investments under Surjit Bhalla from 2007 to 2010, starting as a research associate and quickly progressing to portfolio manager. He helped develop investment strategies, portfolio analytics framework and generating investment ideas for the portfolio.

Varun served as a Visiting Faculty in Finance at Birla Institute of Management Technology from 2011-2012. He was on the editorial board of Developing Trends, an institutional macro publication on India. He holds a MSc Economics from the University of Warwick, UK and a BA (Hons) Economics from Delhi University.

Investment team

Tarun Khandelwal has over 35 years of experience in the financial services industry as a broker, proprietary trader and investment manager. He specializes in applying the combination of fundamental analysis and technical analysis to markets. Tarun has extensive experience in broking, investing and trading. He has a deep knowledge of financial markets, promoter groups, political alliances, government policies, business models and corporate governance in India.

Tarun has been running a proprietary trading operation since 2003 till date. Prior to that, he was running Archna Securities Pvt Ltd, an NSE broker since 1995. Tarun founded Archna Securities Pvt Ltd in 1992 in Kolkata. Before founding Archna Securities, he worked in the family firm – Narayan Das Khandelwal & Co – a founding member of the Calcutta Stock Exchage. He has seen Indian markets develop from their incipient stages of the outcry system.

Investment team

Sanchit Mehdiratta started his career at Bullero over three years ago as an analyst. Sanchit specializes in developing mathematical trading models, statistical testing of trading trading strategies, implementing algorithmic trading solutions and risk management.

His responsibilities include implementation of portfolio strategies, monitoring portfolio risk, and the upkeep of our financial databases. He has a degree in Mathematics from Hans Raj College, University of Delhi.

Shivani Lal has over four years of experience in the financial markets. She started her career with Bullero in 2009 as an analyst and trader. Her responsibilities include trade execution, risk reporting and independent implementation and monitoring of risk limits. She has a degree in Commerce from the University of Delhi.

Investment philosophy

We invest in blue chip companies trading at cheap valuations offered by market declines

These investment candidates are estimated within the context of the domestic and global macroeconomic factors

We apply technical analysis to define entry/exit points from our investment stocks

Blue chip stocks have stop losses as well; we believe things can go wrong in any segment of the market.

We believe that innovation is essential; we apply the latest investment research and build proprietary models that are differentiated from street research

We take a disciplined, quantitative approach to finding opportunity, capturing alpha, managing risk and assessing performance

The ability to monitor statistical index/stock/sector relationships in real-time provides us with a deeper understanding and provides unique trading opportunities

Qualitative Quantitative

Investment strategies

Multifactor models• Constructs a portfolio of

market neutral positions from the FNO space based on value, growth, reversion and momentum alphas

Pairs Trading• Basis –stocks have statistical equilibrium

relationships• Trigger –stocks diverge to a statistically

significant extent• Profit – achieved when stocks converge to

equilibrium

Quasi-arbitrage opportunities• Between different classes of shares with the

same underlying • Example – Tata Steel EQ and CCPS, Tata

Motors and DVR

Open offers

De-listings

Merger Arbitrage

Blue Chips

Investment process

Step 1: Macroeconomi

cs

Analysis of global economic

situation and capital flows

Top down view of risk factors, political cycles, policy measures

Interest rates, exchange rates

and other macro variables

Step 2: Opportunities

Identified

Proprietary Quantitative

Models

Arbitrage Opportunities/

Special Situations

Investment opportunity in blue chips at

cheap valuations

Step 3: Portfolio level

analysis

Opportunities evaluated in the context of the

overall portfolio

Liquidity and market

structure related checks

Correlation check of trading

idea with existing

exposures

Step 4: Risk

Monitoring and Limits

Risk limits and parameters validated

Positions sized depending on

volatility

Positions monitored for

profit-booking / stop-losses

Investment process

Our edge is in our research driven investment process Before establishing any positions, the team evaluates a variety of factors

not easily captured by traditional valuation models Global business and credit cycles Liquidity cycle Market technicals Political dynamics Likely economic policy path

As a policy, we do not take positions contrary to dominant macroeconomic themes; we are not a bottoms’ up fund

The portfolio is a product of ongoing research and risk assessment

Example – pairs trading

Pairs trading helps generate returns uncorrelated with equity market performance; they are a useful instrument for diversification of portfolio risk

We monitor over 1000 intra-sector and inter-sector pairs across different instruments on a daily basis using our quantitative models

Our models are proprietary – we do not use the bollinger bang/standard deviation/correction methods commonly used by the sell side

Pairs trading is usually avoided during earnings season and during periods of market stress

Example – pair trading

Exit Date Profit (%) Duration Long Short27-May-10 6 7 ACC Ambuja16-Aug-10 3.9 16 Ambuja ACC04-Oct-10 4.9 7 ACC Ambuja25-Nov-10 6.7 11 ACC Ambuja27-Dec-10 1.3 9 Ambuja ACC28-Jan-11 4.4 12 Ambuja ACC18-Feb-11 2 12 Ambuja ACC12-May-11 1.3 27 ACC Ambuja25-Jul-11 1 10 Ambuja ACC13-Oct-11 2 2 Ambuja ACC02-Dec-11 2.7 3 Ambuja ACC24-Feb-12 -0.1 10 Ambuja ACC23-Apr-12 2.3 1 ACC Ambuja17-May-12 3 11 Ambuja ACC02-Jul-12 -3.6 21 ACC Ambuja05-Sep-12 0.4 26 ACC Ambuja19-Nov-12 1.2 30 ACC Ambuja15-Jan-13 1.9 1 Ambuja ACC08-Feb-13 5.3 7 ACC Ambuja25-Mar-13 4 13 ACC Ambuja14-Jun-13 1.9 3 Ambuja ACC25-Jul-13 11.2 23 ACC Ambuja06-Aug-13 3.6 7 Ambuja ACC

Example – quasi arbitrage

TATA Steel / Corus merger resulted in the issue of convertible shares that traded at a discount of about 16% to 18% to the TATA Steel shares; a riskless arbitrage trade involved buying the CCPS and shorting the TATA Steel futures

Such opportunities present themselves intermittently, and when structured properly, offer fantastic risk/reward trades for the patient investor

In the present market, Tata Motors / DVR offer a similar opportunity with an added element of risk – there is no conversion. The relationship can be statistically modeled and traded for superior-risk adjust returns

These trades present us opportunities to diversify risk and reduce portfolio/market correlation

Risk management

We believe that without a strictly defined risk management system, even the best investment strategies may fail to deliver acceptable returns

Risk management is the first step in the integrated investment process. It is a proactive, ex-ante approach to identify, quantify, and manage risks

Risk identification: No trade is executed without thorough analysis of all sources of market and instrument-specific risks

Risk measurement: Our quantitative, proprietary risk management system measures risk of each new trade/position from a variety of perspectives Stand-alone volatility Marginal contribution to portfolio volatility – low portfolio correlation preferred Risk concentration in single name/sector

Risk constraints: Portfolio volatility, diversification, beta, single name crash/open offer

Risk management

Multiple strategies, one book: primary risk management is portfolio-wide

Portfolio PNL, directional risk, and stop level are monitored real-time. We have volatility targets for our portfolio; if volatility rises, we actively reduce exposure till portfolio volatility is in target zone

Beta exposure of the portfolio is re-estimated regularly via our proprietary quantitative algorithms; we are very sensitive to shifts in the beta of our exposures

Trading strategies have clearly defined, ex-ante, risk budgets. If these are exceed, the strategy is decommissioned till performance resurfaces

Entire portfolio has strict drawdown limits 7.5% - evaluation of source of losses. If temporary, positions held. 10% - If same problems persist, we reduce exposure. 15% - sharp cut in exposure till drawdowns start recovering

Risk management

Systemic Risk We believe systemic risks continue to exist in the global financial

system, particularly in Europe, China and Japan We monitor the macro economic conditions, bond markets, interbank

money markets, and yield curves of countries around the world to stay alert to signs of rise in stress in the financial system

Lowering of portfolio exposure during periods of triggered systemic risk events

Crisis offers opportunity – only if you have cash Maintenance of conservative portfolio in extreme situations with

extensive application of qualitative analysis

Operational Risk Use of offsite systems for operational redundancy Duplication of trading and research systems on Amazon AWS Cloud Avail services of high quality counterparties with strong financials

Fund structure

While not a SEBI requirement, we have appointed Kotak Mahindra Bank as custodians to the fund For greater transparency in accounting and handling of client assets Fund Accounting – profit/loss, NAV, reporting, etc. Client’s Depository and Bank accounts Allocation of trades by custodian/fund accountant according to pre-

determined allocation matrix

We are a pure portfolio management firm – only charge management/performance fees from client

It is not our intention to develop a direct marketing channel; we will market our products through distribution channels only

Fund structure

CustodianKotak Mahindra

Bank

Bullero CapitalDistributor /

Broker

Client

Revenue

Accounting

Fund reporting

Kotak Bank has been appointed as the custodian of assets, and clearing member in cash/derivative segment

Kotak Bank is also the fund accountant responsible for maintain client accounts and performance reports

Client NAV is available on a daily end-of-day basis from Kotak

The set-up ensures transparency in handling of client assets and reporting

Data infrastructure

Bullero maintains one of the richest possible datasets on Indian financial markets

We analyze in real-time market data at the bid/offer level to estimate liquidity impacts, high frequency trading activity and strength of market moves

In addition to financial data, we have designed news bots to seek out company specific news from blogs and financial websites

Our back testing platforms are developed in-house by us using a combination of R, Stata, and C++

Self developed systems enable us to avoid the common pitfalls that plague most users of commercial software such as over fitted trading models, poor live performance and restrictions on strategies spanning multiple instruments

Terms and service providers

Minimum investment: INR 2.5 million

Additional Investments: INR 100,000

Management fee – 2% up-front

Performance fee – 20% annually

Hurdle Rate - none

High watermark – Yes

Entry load – none

Exit load - 5% if withdrawn prior to completion of first year

Custodian Fees – 20bps per annual

Brokerage – industry norms

Custodian: Kotak Mahindra Bank

Fund Accountant: Kotak Mahindra Bank

Legal Counsel:Ankur Sood & Co

Brokers:India Infoline LimitedReligare Securities Limited

Fees and Charges Service Providers

What is true…and clarifications..

What is true? The strategy is not leveraged as per compliance with SEBI

regulations The strategy may vary net exposure from 0% to 100%

depending on market conditions and valutions Strategy uses a combination of quant, fundamental and

technical factors

and what needs clarification…. Returns may be negative This strategy is not a substitute for long-term equity

investment portfolio

Contact Us

Varun KhandelwalManaging Director

Bullero Capital Pvt Ltd306 ABW Towers

MG Road, IFFCO Chowk

Gurgaon 122 002, India

Mobile: 99719 05678

Phone: +91 (124) 411 0803/04/05

Fax: +91 (124) 400 0806

Email: [email protected]