The Discount Rate Pyramid Scheme

Global central banks (GCB) have artificially raised the NPV of income-producing assets for 34 years, by persistently cutting interest rates (I.1, p7). Yet, rate intervention bred asset/liability value gaps vs. natural rates (V.3, p92), which ultimately, grew until crushing asset prices (1987, 1997/98 & 2007/08). As each crisis devalued richly-priced collaterals guaranteeing loans held by Global Systemically Important Banks (GSIBs), it impaired them, which led GCB to swap them for newly-issued sovereign debt (see p3-4) “to avoid systemic events.” Over three decades, this mechanism has helped G-7 debt grow by 500% (I.2, p8) taking GCB balance-sheets (IV-center, p67) and rate-cuts to their limits (bottom). Similarly, for the third time in 15 years, intervention has driven stock valuation

to two standard deviations over the mean, a level reached only once the prior 100 years and that always ended in losses of 20%-50% of market value. Finally, rate-driven valuation explains why, at extreme market events, asset price correlations shift towards one, spiking spot volatility, while forward volatility stays underpriced, as market participants have grown to expect radical GCB policy action. All of the above has led to volatility being so mispriced, from a risk-reward perspective, that a strategy of acquiring it, may profit massively, while keeping losses restrained, as confirmed by our three-year track record.

SRAF highlights: August 2015 net performance: +49.60% 2015 YTD net performance: +55.52% 2014 net performance: +0.07% 2013 net performance: +15.12% 2012 net performance: +19.71% 3 Year CAGR: +21.3% Annualized Return Since Inception (July 1, 2012): +22.01%

Since inception, Systemic Risk Averse Funds SPC LTD. (SRAF) has incurred significantly less risk than most hedge funds, while surpassing many of them in performance. Certainly, if volatility continues reaching the levels achieved in the past two months, an investment manager might consider allocating 15% to 20% of his portfolio’s AUM to SRAF: As charts created with ZephyrStyleADVISOR™ show below, by reducing draw-downs during peak-volatility events, such allocations would have dramatically increased capital preservation in a balanced growth fund and thus, enhanced its annualized return by over 200 and 300 bps, respectively.

"Morpheus opens a container which

holds two pills: a blue one, and a red

one. He puts one in each hand, and

holds them out to Neo.

Morpheus: This is your last chance.

After this, there is no turning back....

You take the blue pill, the story

ends. You wake up and

believe...whatever you want to

believe. You take the red pill….

You stay in wonderland...and I show

you just how deep the rabbit hole

goes.

Neo pauses for an instant, then

reaches for the red pill. He swallows

it down with a glass of water, and

looks at Morpheus.

Morpheus: Remember...all I'm

offering you is the truth: nothing

more."

THE DISCOUNT-RATE PYRAMID SCHEME

This communication may contain information that is legally privileged, confidential or exempt from disclosure. No confidentiality or privilege is lost or

waived by mistransmission. If you are not the intended recipient, please notify the sender via return email immediately and delete this message from

your system. Disclosure, use, distribution or copying this message, any attachments thereto or their contents is strictly prohibited.

NOTE ON PERFORMANCE:

Any reference to performance figures, statistics or comparison should be considered for illustrative purposes only, they come from the referenced

manager as estimates and are not independently verified. All information should be verified by appropriate legal documentation, official audits or

otherwise independently by the reader of this email or any follow up materials.

NOT AN OFFER OR SOLICITATION:

Nothing in this email or any attachments thereto is an offer to sell or solicitation to buy any product or service. Any investment should be made subject

to legal documentation thereof and based upon independent review of the merits, as well as risks, of such an investment on its own and in context of a

broader investment portfolio. Any investment should also consider the specific financial position and goals of the individual or institution and take into

account the overall economic environment.

http://www.bis.org/publ/arpdf/ar2015e.pdf


http://www.financialstabilityboard.org/wp-content/uploads/r_111104bb.pdf?page_moved=1

https://www.academia.edu/7520619/MITIGATING_LEGALLY_MANIPULATED_FINANCIAL_MARKETS_AND_STATISTICS_INFORMATION_ASYMMETRY_BY_DESIGN_



http://www.bloomberg.com/news/articles/2015-08-30/jackson-hole-questions-inflation-mastery-sought-by-draghi-co-?cmpid=BBD083115_BIZ

http://www.advisorperspectives.com/dshort/charts/valuation/valuation-overlay.html?valuation-indicators-average-geometric.gif

http://www.styleadvisor.com/products/styleadvisor/index.html

1

Zephyr StyleADVISOR

Growth of $100September 2012 - August 2015 (Single Computation)

100

105

110

115

120

125

130

135

Aug 2012 Dec 2012 Jun 2013 Dec 2013 Jun 2014 Dec 2014 Aug 2015

Balanced Growth

Balanced Growth w SRAF

Balanced Growth w SRAF2

60% MSCI ACWI40% Citi World Gov't Bond IX

Portfolio Performance vs. 60% MSCI ACWI40% Citi World Gov't Bond IX

Balanced Growth

AnnualizedReturn (%)

CumulativeReturn (%)

Std Dev(%)

AnnualizedExcess

Return (%)

CumulativeExcess

Return (%)

InfoRatio

SignificanceLevel (%)

ExplainedVariance (%)

TrackingError (%)

6.75 21.65 6.08 1.90 6.38 1.01 91.02 92.23 1.89

Balanced Growth w SRAF 8.98 29.43 5.23 4.13 14.15 0.73 85.21 32.57 5.66

Balanced Growth w SRAF2 9.80 32.36 5.99 4.94 17.08 0.68 83.82 11.92 7.27

Created with Zephyr StyleADVISOR. Manager returns supplied by: Morningstar, Inc.

2

Zephyr StyleADVISORZephyr StyleADVISOR: Zephyr Associates

Blend WeightsAs of August 31, 2015

Balanced Growth Balanced Growth w SRAF


7.0% 6.4%7.0% 5.1%7.1% 5.0%4.0%7.4% 1.5%

10.0% 15.2%12.2% 12.2%

5.1%5.1% 5.0%5.4% 5.0%7.0% 4.6%4.1%8.0% 1.5%

10.2% 14.8%12.2% 12.2%

5.0%5.0% 5.0%5.1% 5.0%5.1%4.6%5.4%

4.1%1.5%

10.2%

19.7%12.2%12.2%

Fidelity® Cash Mgmt Fds Tax-Free MMktRussell Tax Exempt Bond SVanguard Interm-Term Tx-Ex InvRussell Global Infrastructure SFidelity® Real Estate IncomeLegg Mason BW Absolute Return Opp IRussell Multi-Strategy Alternative SVanguard S&P 500 ETF (NAV)Russell US Small Cap Equity SVanguard FTSE Developed Markets ETF (NAV)Oakmark Global IMFS® Global Equity IRussell Emerging Markets SSRAF Fund


3

Zephyr StyleADVISOR

Mgr. vs. BM ReturnsSeptember 2012 - August 2015 (not annualized if less than 1 year)

Ret

urn

-8

-6

-4

-2

0

2

4

6

8

10

YTD 1 year 1 year 1 quarter 1 year 2 quarters 1 year 3 quarters 2 years 2 years 1 quarter 2 years 2 quarters 2 years 3 quarters 3 years SinceInception

Balanced Growth




Zephyr StyleADVISORSeptember 2012 - August 2015 (not annualized if less than 1 year)

Balanced Growth



YTD 1 year 1 year 1 quarter 1 year 2 quarters 1 year 3 quarters 2 years 2 years 1 quarter 2 years 2 quarters 2 years 3 quarters 3 years SinceInception

-2.75% -3.63% -1.39% 0.68% 1.89% 5.17% 3.98% 4.81% 6.30% 6.75% 6.75%

4.46% 5.48% 5.94% 6.38% 5.96% 8.11% 5.88% 7.12% 8.57% 8.98% 8.98%

6.66% 8.53% 8.49% 8.34% 7.36% 9.18% 6.59% 8.02% 9.45% 9.80% 9.80%

60% MSCI ACWI40% Citi World Gov't Bond IX -3.06% -6.47% -3.76% -1.35% 0.11% 3.70% 3.25% 3.63% 4.36% 4.85% 4.85%


4

Zephyr StyleADVISORZephyr StyleADVISOR: Zephyr Associates

Manager StyleSeptember 2012 - August 2015 (12-Month Moving Windows, Computed Monthly)

S&P 500 MSCI EAFE Index

Barclays U.S. AggregateBarclays GlobalTreasury ex-U.S.

BofA Merrill Lynch US EmergingMarkets Sovereign & Credit

Dow Jones Emerging Markets

Equity

-1

0

1

Fixed

Domestic -1 0 1 Eur

Balanced Growth




Equity vs. Fix Inc - Global

Performance AttributionSeptember 2012 - August 2015 (Single Computation)

Balanced Growth Balanced Growth w SRAF


97.4%

2.6%

36.4%

63.6%

83.3%

16.7%

ResidualR-Squared to Style Benchmark


5

Zephyr StyleADVISOR

Zephyr StyleADVISORSeptember 2012 - August 2015

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Aug 2012 Dec 2012 Jun 2013 Dec 2013 Jun 2014 Dec 2014 Aug 2015

Balanced Growth




Balanced Growth



MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

MaxDrawdown

Recovery Date

PainIndex

PainRatio

Omega(MAR = 0.00%)

Gainto LossRatio

High WaterMark Date

To HighWater Mark

-5.43% May 2015 Aug 2015 4 N/A 0.63% 10.60 2.17 1.22 Apr 2015 5.74%

-2.72% Jun 2013 Aug 2013 3 Oct 2013 0.47% 18.91 3.25 1.43 Aug 2015 0.00%

-3.14% Jun 2013 Aug 2013 3 Oct 2013 0.56% 17.53 3.46 1.52 Aug 2015 0.00%

60% MSCI ACWI40% Citi World Gov't Bond IX -6.47% Sep 2014 Aug 2015 12 N/A 1.31% 3.68 1.67 1.06 Aug 2014 6.92%


6

Zephyr StyleADVISOR

Upside / DownsideJanuary 2015 - August 2015 (Single Computation)

Ups

ide%

-100

-50

0

50

100

150

200

250

300

Downside%

-100 -50 0 50 100 150 200 250 300

Balanced Growth




Balanced Growth


Return(%)

Std Dev(%)

Downside Risk(%)

SharpeRatio Observs.

6.75 6.08 4.54 1.1039 36

8.98 5.23 3.82 1.7100 36

Balanced Growth w SRAF2 9.80 5.99 3.98 1.6271 36

60% MSCI ACWI40% Citi World Gov't Bond IX 4.85 6.67 4.77 0.7213 36


7

Zephyr StyleADVISOR

Multi-StatisticSeptember 2012 - August 2015

-3

-2

-1

0

1

2

3

4

SortinoRatio

(MAR =Cash Eq.)

Value at Risk(Cornish Fisher)(Confidence =

95%)

Balanced Growth





8

Zephyr StyleADVISOR

Correlation Matrix

1) SRAF Fund

2) MSCI EAFE Index

3) Dow Jones Emerging Markets

(1) (2) (3)

1.00

-0.37 1.00

-0.33 0.74 1.00

4) Global Government Bond -0.22 0.29 0.33

5) HFRI Macro (Total) Index -0.14 0.37 0.22

6) HFRX Macro/CTA Index -0.28 0.11 -0.04

7) S&P GSCI Precious Metals 0.05 0.08 0.18

8) 60% MSCI ACWI40% Citi World Gov't Bond IX -0.36 0.94 0.80

(4)

1.00

0.33

0.24

0.40

0.41

(5)

1.00

0.78

0.20

0.36

(6)

1.00

-0.11

0.08

(7)

1.00

0.15

(8)

1.00


9

Zephyr StyleADVISOR

Correlation Matrix

1) Balanced Growth w SRAF2

2) MSCI EAFE Index

3) Dow Jones Emerging Markets

4) Global Government Bond

5) HFRI Macro (Total) Index

6) HFRX Macro/CTA Index

7) S&P GSCI Precious Metals

8) 60% MSCI ACWI40% Citi World Gov't Bond IX

(1) (2) (3) (4) (5) (6) (7) (8)

1.00

0.30 1.00

0.26 0.74 1.00

0.04 0.29 0.32 1.00

0.23 0.39 0.21 0.28 1.00

-0.12 0.11 -0.06 0.19 0.77 1.00

0.09 0.06 0.19 0.40 0.22 -0.13 1.00

0.35 0.94 0.80 0.40 0.37 0.07 0.13 1.00


10

Zephyr StyleADVISOR

Correlation vs. Market Benchmark / TimeSeptember 2012 - August 2015 (12-Month Moving Windows, Computed Monthly)

Cor

rela

tion

vs.6

0%M

SCIA

CW

I40

%C

itiW

orld

Gov

'tBo

ndIX

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Time

Aug 2013 Dec 2013 Mar 2014 Jun 2014 Sep 2014 Dec 2014 Mar 2015 Aug 2015

Balanced GrowthBalanced Growth w SRAFBalanced Growth w SRAF2


11

Zephyr StyleADVISORMulti StatisticsSeptember 2012 - August 2015

0

2

4

6

8

10

Alphavs.

Market

Excess Returnvs.

Market

Omega(MAR = 0%)

Balanced Growth




Zephyr StyleADVISORSeptember 2012 - August 2015: Summary Statistics

Balanced Growth



Alphavs.

Market

Betavs.

Market

Excess Returnvs.

Market

PainRatio

Omega(MAR = 0.00%)

SortinoRatio

(MAR =Cash Eq.)

BattingAverage

vs.Market

2.41% 0.88 1.90% 10.60 2.17 1.88 55.56%

6.74% 0.45 4.13% 18.91 3.25 3.46 61.11%

8.31% 0.31 4.94% 17.53 3.46 3.70 61.11%

60% MSCI ACWI40% Citi World Gov't Bond IX 0.00% 1.00 0.00% 3.68 1.67 1.21 0.00%


12

Zephyr StyleADVISORA

lpha

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

YTD 1 year 1 year 1 quarter 1 year 2 quarters 1 year 3 quarters 2 years 2 years 1 quarter 2 years 2 quarters 2 years 3 quarters 3 years

Balanced Growth




Beta

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00


Balanced Growth





13

Zephyr StyleADVISORD

own

Cap

ture

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


Balanced Growth




Sor

tino

Rat

io(M

AR

=C

ash

Eq.

)

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00


Balanced Growth





14

Zephyr StyleADVISORA

vera

geD

own

Ret

urn

-3.50%

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%


Balanced Growth




5th to 25th Percentile

25th Percentile to Median

Median to 75th Percentile


Sor

tino

Rat

io(M

AR

=C

ash

Eq.

)

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00


Balanced Growth





25th Percentile to Median

Median to 75th Percentile



15

Zephyr StyleADVISOR

OmegaSeptember 2012 - August 2015

Om

ega

0

0.5

1

1.5

2

2.5

3

3.5

4

Annual MAR

0% 5% 10% 15% 20% 25%

Balanced Growth





The Discount Rate Pyramid Scheme

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