Castle Ridge Asset Management

Castle RidgeAsset ManagementRit eos reperum nis et fuga Vidempos doluptatet alicat elenecto que poreribustium deliber chicat qui derepe presimil. Castle Ridge Asset Management 1

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PREPARE FORTHE FUTUREUncertainty and change are the only predictable factors forbusinesses in a world where once-stable regimes fall within weeks,and supposedly strong organisations and economies collapseunexpectedly. The idea that the future is unpredictable is underminedevery day by the ease with which the past is explained. The absolutemajority of portfolio managers, market analysts and other financialprofessionals share a comforting conviction that the world theyoperate in makes sense. This conviction rests on the most securefoundation: their unlimited ability to ignore their own ignorance.We, humans are prone to overestimate our understanding of theworld and to underestimate the role that unpredictable eventsplay in it. Most of the common financial models are built upon theoptimistic illusion that the thorough understanding of the pastjustifies our abilities to predict the future. This optimism is stillhighly valued in the market. Individuals and organizations of allkinds reward the providers of the misleading optimism more thanthey reward constructive sceptics. One of the lessons of the mostrecent financial crisis is that there are periods in which our collectivedeliberate blindness to risk and uncertainty generates the mostextreme forms of mass complacency.The sober truth is - we cannot predict the future, all we can do is toprepare for it.Castle Ridge Asset Management 3

SUPERADAPTATION What does it mean to be prepared? A good way to do it is to constrain our beliefs by the logic of probabilities and create the most adaptive toolbox of fast and frugal heuristics to enable the nimble responsiveness to sudden changes in the environment. [REPHRASE] We call it “Super-Adaptation”.4 Castle Ridge Asset Management

Unlike typical Adaptive Asset Allocation strategies thatare designed to simply “survive” the unfavorable marketconditions, Super-Adaptive portfolios are created to notjust survive, but to thrive from the market turbulences and“harvest” volatility.Super-Adaptation is rare. Alfred Russel Wallace was a19th century British biologist known for independentlyconceiving the theory of evolution through natural selection,pre-dating Charles Darwin’s publications. Wallace revealedthat species thrive in an environment when they do not justtolerate it, but when they can benefit from it.A prime example of Super-Adaptation can we seen with“Wallace’s Flying Frog” discovered by Alfred R. Wallace inwestern Indonesia. The Wallace’s Flying Frog is one of themost profound examples of natural selection that took thesurvival of the fittest concept to its extreme. There is animportant distinction between the process of evolutionand the process of adaptation. Evolution is inheritablechange in the genetic composition of a population duringsuccessive generations occurring via random mutation,natural selection, and genetic drift. This process oftenresults in profound changes within a group of species or inthe development of new species all together.Adaptation, on another hand, is the ability of a particularorganism to survive in a specific ecological niche, especiallybecause of alterations of form or behavior brought aboutthrough natural selection. In other words, evolutiondetermines the range of the organism’s adaptability to itsenvironment. In this respect Super-Adaptation– the abilityof an organism to not just survive, but to benefit from thesudden changes in the environment - is rarely observed innature and, therefore, it is very difficult to achieve throughalgorithmic modeling.Castle Ridge Asset Management 5

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W.A.L.L.A.C.E.Castle Ridge Asset Management 7



MEETW.A.L.L.A.C.E.Castle Ridge Asset Management is pleased to introduce W.A.L.L.A.C.E. -the world’s first Super-Adaptive genetic algorithm based Asset Allocationsystem. W.A.L.L.A.C.E. is the result of more than 18 years of researchinto Artificial Intelligence, Genetic Algorithms and Machine Learning todevelop an investment platform that exhibits outperforming returns inall market conditions.The incredible thing about W.A.L.L.A.C.E. is its ability to generate Super-Adaptive portfolios of assets. Through the use of its unique, two-stagegenetic algorithm, W.A.L.L.A.C.E. first identifies the type of asset mix thatprecisely addresses specific investment objectives (custom investmentmandates) and then forms and manages multiple investment portfoliosto ensure their extreme Super-Adaptiveness to ever changing marketconditions.Castle Ridge Asset Management 9

ANTI FRAGILITY Our Super-Adaptive Asset Allocation Strategy is a disciplined, rules-based, systematic approach based on the melding of modern quantitative models and human intelligence. All the investment decisions are made using effective and formal interaction between W.A.L.L.A.C.E. and our experienced portfolio managers. The interaction is free of emotional and behavioural flaws inherent in conventional ways of investing. We do not rely on “oughts” and “ifs”. We do not employ opinions or beliefs; all our decisions are driven by quantifiable and empirical evidence provided by W.A.L.L.A.C.E.’s incredible Big Data Analytics abilities. No feelings, no narratives, no stories, no ego, just robust, consistent returns with the lowest amount of risk. That is exactly what Anti-Fragility means.10 Castle Ridge Asset Management

“ machine intelligence basedautomated asset allocation systemthat creates, maintains, and evolves investment portfolios consisted of highly diverse asset classes ~ Adrian de Valois-Franklin ~Castle Ridge Asset Management 11

HOW DOESW.A.L.L.A.C.E. WORK ?W.A.L.L.A.C.E. is machine intelligence based automated asset allocation system that creates, maintains, andevolves investment portfolios consisted of highly diverse asset classes. At the core of W.A.L.L.A.C.E. are fiveproprietary algorithms that create asset mixes by detecting the sustainable behavioral patterns in large volumesof market data. Universe Selection Algorithm is the automated search engine that forms initial assembly of asset classes whose characteristics match the portfolio mandates and other investment criteria presented to W.A.L.L.A.C.E. by the Portfolio Manager Assets Pairwise De-coupling Algorithm is the intelligent filter that allows the creation of securities’ mixes that exhibit substantial reduction of their asset synchronization leading to the increased efficiency of the overall investment process.12 Castle Ridge Asset Management

BIAS Weighing Algorithmis the securities ranking system that assigns the range ofweights to the securities in the Initial Universe based on theirexposure to the following types of investment BIASs:1. Representativeness2. Disposition effect3. Familiarity bias4. AnchoringPrice Turbulences Detection Algorithmis an instrument that allows W.A.L.L.A.C.E. the assessmentof the potential asset’s price reaction to public news eventsand asset’s specific information releases.Portofolio Rebalancing Algorithmis a system for implementing the recommendations thatare generated by other W.A.L.L.A.C.E. engines in order toconstruct the portfolios that most likely to deliver the requiredreturns in any market conditions. It monitors:1. Realized Volatility2. Consistency of returns3. Relative Strength4. Independency of asset classes5. Market Capitalization6. Liquidity7. Dividend rateCastle Ridge Asset Management 13

MEET OURMANAGEMENT TEAM Adrian de Valois-Franklin Dr. Alex BogdanPresident and Chief Investment Officer Chief Scientific OfficerAdrian is an investment professional with a wealth Alex is an accomplished Quantitative Analyst with aof experiences that merges finance with cutting-edge wide range of interdisciplinary knowledge. He holdstechnology. Prior to co-founding Castle Ridge Asset a Ph.D. in Computer and Mathematical SciencesManagement, Adrian served as Chief Financial Officer from the A.F. Mozhaisky Military Space Engineeringfor Excelion Technology Inc, a software provider of Academy in St. Petersburg and a Ph.D. in Electricalreal-time big data analytics for enterprises. Adrian and Computer Engineering from the Belarusian Statecombines his experience in the technology sector University of Transport. He has over 20 years ofwith finance and strategy as a Private Equity investor. experience in the financial services industry and hasMost recently, Adrian served as a member of the developed some of the most innovative multi-strategyPrincipal Investing group for the $270 billion Canada portfolio management methodologies, quantitativePension Plan Investment Board (CPPIB) in Toronto. models, automated trading systems, and investmentPrior to CPPIB, Adrian focused on acquiring and algorithms. His diverse knowledge and experiencegrowing technology companies with Accel-KKR in in mathematics, psychology, and engineering allowsSilicon Valley; a joint venture between the private him to generate alternative investment concepts,equity firm Kohlberg Kravis Roberts & Co. and the design cutting-edge portfolio structures, developventure capital firm Accel Partners. Adrian also risk analytics, evaluate strategy performance, andbrings Capital Markets experience from his time with implement turn-key trading algorithms.Goldman Sachs in New York and San Francisco.14 Castle Ridge Asset Management

Michael Petruzella Peter GeorgePresident and Chief Investment Officer Chairman and Managing DirectorMichael brings 20 years of experience in the Peter has for the past 20 years, been involved infinancial services industry. Prior to starting Castle mergers and acquisitions, venture capital and projectRidge Asset Management, he was, with Arrow Capital and product management. This has included newManagement, a $1.2B AUM Alternatives manager. business development, relationship building andBefore that, he has held positions with industry leading management, infrastructure development and capitalbanks, mutual fund companies, and service providers, raising. This has included new business development,covering Portfolio Management, Risk Management, relationship building and management, infrastructureClient Services, Operations, and Fund Accounting. development and capital raising. This has includedBefore that, he has held positions with industry leading new business development, relationship building andbanks, mutual fund companies, and service providers, management, infrastructure development and capitalcovering Portfolio Management, Risk Management, raising. This has included new business development,Client Services, Operations, and Fund Accounting. relationship building and management, infrastructure development and capital raising. This has included new business development, relationship building and management, infrastructure development and capital raising. Castle Ridge Asset Management 15

Our Vision In the world of paradigms there is an expression: “Shift Happens”. Our lives consist of those shifts. They occur when knowledge and experience we accumulate no longer fit with the views of the world we have previously developed. When this occurs, we suddenly realize that the only way for us to go forward is to change our all-too-comfortable old models and embrace the challenges that lie ahead. If you experienced this moment, a moment of complete dissatisfaction with the “old” and uncontrollable desire for the “new”, you might find yourself ready to accept our completely unique approach to investing in the markets. Our obsessive evaluation of past strategies has convinced us that a fundamental “shift” is needed. Traditional investment strategies are no longer a match for the exponentially complex dynamics of today’s and tomorrow’s markets. In a system where the majority of daily decisions, trades, and buy/sell orders are now generated by computers, it becomes increasingly difficult for individual portfolio managers to analyze the vast amounts of data generated. In response, Castle Ridge Asset Management believes the future of fund management lies in the partnership between human fund managers and machine based analytics. At the very core of our beliefs lies the idea of the bionic symbiosis between the human decision maker and the computer. In no way do we promote fully automatic decision making by computers alone, but the organic melding of the best abilities of humans and machines. We believe that our pursuit of superior investment results is only possible though achieving the “happy marriage” between our highly evolved human intuition and quantitative analysis of big data through the most efficient number-crunching genetic algorithms.16 Castle Ridge Asset Management

Our goal is the quantifiable success of our clients. Our StrategyTo achieve this goal we must succeed in the mostcompetitive professional domain in the world – Using the modern Systems Theory notion offinancial markets. “Anti-Fragility” proposed by the pioneer of the unconventional risk models - Nassim Nicholas Taleb,We believe that our highly experienced portfolio W.A.L.L.A.C.E. implements a two-stage genetic typemanagement team empowered by W.A.L.L.A.C.E. is of optimization algorithm. This algorithm first createsamong the “fittest” to win that race. We believe the the most suitable universe of securities that fit afollowing: particular investment mandate and then generates1. We can change the way people think about and adjusts investment portfolios that exhibit super- adaptiveness towards the market environments. This investing through the demonstrable benefits of approach delivers strong, consistent performance W.A.L.L.A.C.E.. that is not just resilient to hostile market conditions,2. Market risk can only be managed through but benefits from them. extreme flexibility of investment portfolios and the ability to react to immediate changes in the Investment investment environment. Objectives3. Rigorous data analysis and constant evolution of our portfolios provides a consistent competitive Our objective is to achieve robust investment growth advantage with low volatility and minimal losses regardless of4. Evidence based adaptation of investment economic or market environment. In short, we do strategies and mandates are key to surviving not require a bull market generate positive returns changing markets. for investors. W.A.L.L.A.C.E. is designed to achieve5. Creative investment management can also be positive returns in most 12 month periods and to systematic. actively control annual portfolio volatility to meet6. The market, like nature, favors the “fittest” which predetermined risk tolerance levels. have much better chances of surviving and thirving in ever-changing environments.It is time to shift from archaic, ego-driven portfoliomanagement to unbiased computer intelligence as apart of critical decision making.We invite you to take an evolutionary step forwardand join us in the Super-Adaptive revolution of theinvestment industry. Castle Ridge Asset Management 17

Innovative Risk Research andManagement DevelopmentUsing the modern Systems Theory notion of We believe that one of most the efficient ways to stay“Anti-Fragility” proposed by the pioneer of the ahead is to never fall behind. That is why we considerunconventional risk models - Nassim Nicholas Taleb, our ongoing research and development as the mostW.A.L.L.A.C.E. implements a two-stage genetic type important factor of our success. By constantlyof optimization algorithm. This algorithm first creates refining the algorithms that drive W.A.L.L.A.C.E. wethe most suitable universe of securities that fit a ensure our survival. In the 1998 Kurt Russel movie,particular investment mandate and then generates “Soldier” the main hero was asked a question: “Whatand adjusts investment portfolios that exhibit super- do you feel most of the time?” The answer was:adaptiveness towards the market environments. This “Fear and Discipline”. We believe this motto suits ourapproach delivers strong, consistent performance investment approach. We strive to never becomethat is not just resilient to hostile market conditions, complacent and to follow our rigid discipline at allbut benefits from them. times. We believe that our constant and meticulous research is our guiding light in the rough waters ofCreating Super- the modern markets.Adaptive portfolios Global ApproachOur research shows that individual stock pickerstypically underperform main benchmark indices. It In our constant search for the most efficient assetshas been proven by our research that the decisions we do not limit ourselves either by asset class or byabout the mix of assets have a far greater impact geography. Our asset allocation decisions consideron the success of investing than does the stock more than just a specific country, equities and bonds.picking or market timing. This is counter intuitive By expanding our horizons to include multiple of thefor a great majority of investors, but it has been most liquid and distinct global asset classes, we areproven repeatedly in both academic studies and the significantly better positioned to capture returnsreal world. In short, stock picking is for fun; asset from wherever they may come.allocation is for making money over the long haul.While the overwhelming majority of the investmentfirms focus on cherry-picking stocks, we focus on themost efficient, Super-Adaptive asset allocation. Webelieve that the only way to stay ahead of change isthrough systematic adaptation of assets.18 Castle Ridge Asset Management

Investment ProcessOur process is based on the systematic application of the recommendations generated by W.A.L.L.A.C.E. to auniverse of global asset classes in order to construct portfolios most likely to deliver the required returns in anymarket condition. All portfolios are rebalanced by either a predetermined period of time, market event counter, or bythe certain percentage change in the desired allocation levels.Specifically, W.A.L.L.A.C.E. monitors major global asset classes for changes in their:• Realized Volatility• Consistency of returns• Relative Strength• Independency of other asset classes• Market Capitalization• Liquidity• Dividend rate• Share Buyback activities• Short Interest• Option Open Interest• Implied VolatilityAll these factors are integrated inside of W.A.L.L.A.C.E.’s genetic algorithm and result in Super-Adaptive, consistent,resilient portfolios that generate reliable returns.A typical W.A.L.L.A.C.E. portfolio evolution during the 2008 – 2009 financial crisis is illustrated below.Castle Ridge Asset Management 19

INSIDEW.A.L.L.A.C.E.The W.A.L.L.A.C.E. family of algorithms is the result of more than18 years of research focused on finding an investment solutionthat exhibits market immunity and satisfies the investmentgoals of most investors. To better understand how W.A.L.L.A.C.E.achieves such a delicate balance, the next few sections willshed some light on some of the systems core inner-workings. Itis important to mention that each of W.A.L.L.A.C.E.’s proprietaryalgorithms represent tremendous value on their own and couldbe used separately to dramatically enhance the performance ofany traditional investment strategy.20 Castle Ridge Asset Management

Asset PairwiseDe-couplingAround 1665, the Dutch physicist Christiaan Huygens observed a strangeand unexpected phenomenon between two pendulum clocks hanging nextto each other. As if someone had joined them through an invisible force,the pendulums driving each clock swung in perfect synchronization. As itturns out, Huygens stumbled across one of the most profound mysteriesthat scientists have long been baffled by – Spontaneous Synchronization,which is now considered a universal phenomenon arising in nearly allcomplex systems, regardless of whether they’re composed of birds, fish,neurons, people, or financial instruments. It’s surprising enough to seeanimals cooperating - thousands of crickets chirping in unison, myriads offish gracefully moving in schools - but it’s even more shocking to see mobsof mindless things falling into step by themselves. These phenomena areso incredible that some people deny their existence, attributing them toillusions, accidents, or perceptual errors.Until just a few years ago, the study of synchrony was a splintered affair,with biologists, physicists, mathematicians, engineers, and financialscientists laboring in their separate fields. Our research team began its ownstudy of this phenomenon a decade ago and by the end of 2013 we wereable to clearly identify the synchronous behavior in the markets.Everyone is familiar with the herd-like collective behavior of investorsrushing to buy or sell all at once as they respond to the irresistible impulses,or “animal spirits” of fear and greed. Although bubbles and crashes are themost visible examples of this phenomenon, we have established that thereis a far more subtle and pervasive level of synchronization that occursdaily between different group of investors. We were able to prove that inthe absence of substantial information about a stock, commodity, or anyother financial asset, investors and traders tend to go with the crowd andspontaneously synchronize their buy/sell decisions. This activity ultimatelycreates Pairwise Coupling effect between the securities and ultimatelycauses substantial limitations in abilities to generate excessive returns(alpha).W.A.L.L.A.C.E.’s unique and proprietary Assets Pairwise De-couplingalgorithm allows us to create investment portfolios that exhibit substantialreduction of their asset synchronization thus significantly increasing theefficiency of the overall investment process.Castle Ridge Asset Management 21

The picture below illustrates the power of W.A.L.L.A.C.E.’s De-couplingmechanisms. By simply applying this algorithm to a standard, momentumdriven traditional portfolio, the returns of this portfolio could be improvedby several orders of magnitude. BIAS Investor behaviour often deviates from logic and reason, and investors Weighing display many behaviour biases that influence their investment decision- making processes. Cognitive biases result in tendencies to think and act22 Castle Ridge Asset Management in certain ways. A cognitive bias can be viewed as a rule of thumb or heuristic, which can lead to systematic deviations from a standard of rationality or good judgment. For example, investors often chase past performance in the mistaken belief that historical returns predict future investment performance. We call it the “Momentum BIAS”. This type of BIAS creates quite sustainable inertia in investors’ decisions providing us with a way to generate excessive returns by harvesting this particular market inefficiency. Our extensive research in cognitive biases allowed us to recognise quite a variety of contributing factors that increase the overall Momentum BIAS of the investment portfolio.

Representativeness – a tendency to label an investment as good or badbased on its recent performance. As a result of this bias investors tend tobuy stocks after prices have risen expecting those increases to continueand ignore stocks when their prices are below their intrinsic values.Disposition effect – a tendency of selling stocks that have appreciatedin price since purchase (“winners”) too early and holding on to losingstocks (“losers”) for too long.Familiarity bias – a preference for familiar investments despite theseemingly obvious gains from diversification.Anchoring - a tendency to hold on to a belief and then apply it as asubjective reference point for making future judgments. Anchoringoccurs when an individual lets a specific piece of information controlhis/her cognitive decision-making process.The ability to accurately measure and rank momentum biases ofsecurities is one of the strongest features of W.A.L.L.A.C.E.’s toolbox. Justby applying momentum ranking technique to an average traditional buy-and-hold portfolio can dramatically improve the portfolio’s performance.Castle Ridge Asset Management 23

Asset One of the main roles of financial markets is the production andSensitivity aggregation of information. This occurs via the trading process thatRanking transmits information produced by traders for their own speculative purposes into market prices in general. Our research shows that the market’s remarkable ability to produce information can be used to anticipate the assets’ individual sensitivity to potential news events. By assessing the typical reaction of an asset’s prices to different news events, W.A.L.L.A.C.E. ranks its entire securities universe and uses those ranks to form investment portfolios that have the desired predisposition to benefit from market fluctuations. This novel approach, unlike the traditional price volatility analysis, provides us with what we call the “anti-fragility” of our investment portfolios – an ability to harvest market’s turbulences while aligning its holdings with the general direction of the market. This remarkable ability of W.A.L.L.A.C.E.’s core algorithm is based on its two unique mechanisms: 1. Price non-synchronicity measurements – a computation of the correlation between the asset’s returns and the returns of the corresponding investment universe. This measurement quantifies the likelihood of the individual asset’s prices to convey security-specific information thus to unambiguously show the sensitivity of the asset’s price behaviour to public and security specific news events. 2. Price turbulences ranking algorithm - an instrument that allows W.A.L.L.A.C.E. the direct assessment of the potential asset’s price reaction to public news events and asset’s specific information releases. Overall, W.A.L.L.A.C.E.’s Assets Sensitivity Ranking system uses the measure of potential assets’ price ranges to enhance its investment portfolios returns. In conjunction with other unique features of W.A.L.L.A.C.E.’s core algorithms, this system exploits news events induced market turbulences to produce alpha.24 Castle Ridge Asset Management

W.A.L.L.A.C.E.’s Portfolio’s Examples Castle Ridge Asset Management 25

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General information regarding hypothetical performance charts:These results are based on simulated or hypothetical performanceresults that have certain inherent limitations. Unlike the results in anactual performance record, these results do not represent actual trading.Also, because these trades have not actually been executed, these resultsmay have under- or over-compensated for the impact, if any, of certainmarket factors, such as lack of liquidity. Simulated or hypothetical tradingprograms in general are also subject to the fact that they are designedwith the benefit of hindsight. No representation is being made that anyaccount or fund will or is likely to achieve profits or losses similar tothose being shown. The results do not include other costs of managingportfolios. The charts above have not been reviewed or audited by anindependent accountant or other independent testing firm. More detailedinformation regarding the manner in which the charts were calculated isavailable on request. The hypothetical performance results do not reflectactual trading and may not reflect the impact that material economic andmarket factors may have had on the manager’s decision making were itactually managing the strategy during those time periods. Any actual fundthat the managers manage will invest in different economic conditions,during periods with different volatility and in different securities thanthose incorporated in the hypothetical performance charts shown above.There is no representation that any fund will perform as the hypotheticalor other performance charts indicate.Castle Ridge Asset Management 27

Castle Ridge Asset Management LimitedTD Canada Trust Tower161 Bay Street, Suite 4500, Toronto, ON, M5J 2S1Phone : (62-21) 661 876 1234Fax : (62-21) 661 876 1234E-mail : [email protected] : www.castleridge.com