Microsoft Word - TearSheet-EQ NEUTRAL.docx

KEYSTONE EQUITY MARKET NEUTRAL - KOREA March 2011 STRATEGY DESCRIPTION <Keystone Equity Market Neutral – Korea> enables an investor to generate consistent returns in both up and down markets through a well constructed ‘dollar neutrality’ portfolio of the most liquid Korean stocks. The objective of the strategy is to neutralize the effect of systemic risks and to deliver decorrelated returns of at least 10% per annum with a controlled volatility. STRATEGY FEATURES The strategy is employed on three premises: Firstly, there exist different time forms of lagged response to economic changes and external shocks by industry and style. Secondly, the current domination of ‘liquidity traders’ in the Korean equity space tends to create a number of statistical mispricing of securities in a transitory form. Thirdly, the reshaping of the Korean market enticed by the new ‘Korean Hedge Fund Act’ will likely create a more favorable environment for statistical arbitrageurs. The strategy is implemented through long positions of the top-score portfolio stocks, funded by selling the bottom-score portfolio stocks. Long and short positions are selected according to statistical factors based on Keystone Investment Partners’ proprietary scoring model outputs. The investment process of <Keystone Equity Market Neutral – Korea> goes beyond that of traditional statistical arbitrage strategies. The scoring model has 12 non-market (company-specific) factors, as well as 10 market factors. Within a framework of systematic selection of long and short positions, the strategy allocates varying risk, thereby adjusting the score weight of fundamental factors according to market cycle, market dynamics and market valuation. (See Appendix.) The portfolios are constructed after the 1 quarter of every calendar year and rebalanced every week, st most actively after earnings releases at the end of every fiscal quarter. Selling of index futures is utilized if a shorting of certain individual stocks may be restricted or unavailable. PERFORMANCE (Last 12 months: March 31, 2010 ~ March 31, 2011) KOSPI 50 Top Quartile Portfolio Members (as of March 31, 2010, equal weight to be drifted): Samsung Electro-Mechanics, Samsung Card, Samsung Electronics, Korean Air Lines, Kia Motors, KT Corp, Hynix Semiconductor, Hyundai Motor, LG Chem, Lotte Shopping, Hyundai Heavy, Hyundai Mobis, Kangwon Land. KOSPI 50 Bottom Quartile Portfolio Members (as of March 31, 2010, equal weight to be drifted): KB Financial Group, Woori Financial Group, Daewoo Engineering & Construction, LG Electronics, Daewoo Securities, Doosan Heavy, Daewoo International Corp, Shinhan Financial Group, Samsung Securities, LG Display, Samsung SDI, Hyundai Merchant Marine. Performance Analysis KEYSTONE INVESTMENT PARTNERS Page 1

KEYSTONE EQUITY MARKET NEUTRAL - KOREA Performance vs Benchmark 1 Performance vs Benchmark 2 KEYSTONE INVESTMENT PARTNERS Page 2

KEYSTONE EQUITY MARKET NEUTRAL - KOREA APPENDIX Market Risk Factor Model R(nt) = ∑  X(nkt)*F(kt)+∈ (nt)  R(nt): Security n return for time period t X(nkt): Factor exposure of security n to a factor k at time t with K factors in total F(kt): Factor return to a factor k at time t to be derived from running the regression ∈ (nt): Non-factor return of security n at time t that is not explained by the regression Market Factors: Momentum, Value, Dividend, Size, Turnover, Growth, Leverage, Profitability, Volatility, Earnings Variability (Non-Factor) Fundamental Scoring Factors 1. 1-Year Forward EBIT Growth 2. Risk-adjusted Forward EBIT Growth: 1-Year Forward BIT Growth/Forecast Risk 3. 1-Year Forward Sales Growth 4. Limit Drift: Log of Limit Value of Operating Profit/Life of Capital in Years 5. Operating Margin Improvement: 7-Year Peak-to-Peak Operating Margin Improvement 6. Operating Margin Stability: 7-Year Average Operating Margin/7-year Operating Margin Volatility 7. Forward Shareholder Value: S-Score of Shareholder-Value-Added measured by 1-Year Forward Return on Invested Capital minus Risk-Adjusted Cost of Capital 8. Return Reversion: 1-Year Forward Return on Invested Capital/7-Year Average Return on Invested Capital 9. Cash Yield: (3-Year Average Operating Cash flow–Maintenance Capex)/Enterprise Value 10. Dividend Pool: (Retained Earnings-Legal Reserves)/Market Cap 11. P/E Estimate 12. Youngness of Capital: Age of Capital/Life of Capital Scoring System For each security, a score between zero (worst) and one (best) is computed, by combining the values of a factor with the respective weight. Weight represents each factor’s relative importance and varies according to market cycle, market dynamics, and market valuation. For instance, in a liquidity-driven market situation, more weights are assigned to factors 1~3. On the other hand, weightings get shifted more toward 9~12 in a situation where the market valuation is deemed fair or even stretched. Values for each factor are then accounted with a descending (\"the higher the better\") or ascending (\"the lower the better\") order. KEYSTONE INVESTMENT PARTNERS Page 3

KEYSTONE EQUITY MARKET NEUTRAL - KOREA IMPORTANT NOTICE Portfolio replication and other statistical analysis material that is provided in connection with the explanations of the potential returns of the securities linked to the portfolio use simulated analysis and hypothetical circumstances to estimate how it may have performed prior to its actual existence. The results obtained should not be considered indicative of the actual results. Alternative simulations, techniques, modeling or assumptions might produce different results. Actual results may vary from the simulated returns in this prospectus. KEYSTONE INVESTMENT PARTNERS Page 4