www.investresolve.

com
ReSolve Adaptive Asset Allocation
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Contents

Who we are 3
Objective 4
Background 4
A brief history of modern portfolio theory 4
Introducing Adaptive Asset Allocation 6
Putting together the building blocks 6
Enhanced returns the right way 13
The next generation of portfolio management 14
Disclaimer 15

2 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

WHO WE ARE
ReSolve Asset Management is a quantitative, systematic investment firm that relies on in-depth, academically backed and
empirically proven practices for strategy construction. Our approach is designed to produce innovative strategies that perform in
live trading and range from global tactical to cutting edge alpha.

Our solutions are based on evidence not theory

EXPERIENCED LEADERSHIP TEAM

ReSolve's leadership team has extensive experience in asset management working with high net worth individuals , family offices
and institutions. The team's approach to investing blends the rigour of academic research methods with the hard-nosed practicality
required to implement functional investment strategies in risky markets. Passionate educators, Adam, Mike and Rodrigo have
authored the book Adaptive Asset Allocation - Dynamic Global Portfolios Designed to Profit in Good Times and Bad, as well as
several research papers that rank in the top 1% of most downloaded research on the academically renowned SSRN network.* The
team is also responsible for the popular ReSolve’s research blog.

RODRIGO GORDILLO, ADAM BUTLER, JASON RUSSELL, ANDREW BUTLER,

CIM CFA, CAIA CFA CFA
PRESIDENT CHIEF INVESTMENT OFFICER CHIEF OPERATING OFFICER HEAD OF QUANTITATIVE
AND CCO RESEARCH & OPERATIONS

15 years experience in investment 15 years of experience in investment 28 years of experience in investment Responsible for quantitative research
management. management. management and derivatives including efforts and systems deployment.
Managed Futures strategies.
Responsible for portfolio management Primarily responsible for research and Ph.D Candidate – University of Toronto.
and business development. portfolio management. Oversees futures, day-to-day operations Department of Mechanical & Industrial
and portfolio management. Engineering.
Key contributor on several research Lead author on several public research
whitepapers, Gestaltu blog and whitepapers and GestaltU blog. Portfolio Manager at Salida Capital, CIBC Honors B.Sc. in Applied Mathematics
ReSolve podcasts. World Markets, & Merrill Lynch. Equity & Physics -Memorial University.
Portfolio Manager at Richardson GMP. Derivatives Specialist Bankers Trust.
Portfolio Manager at Macquarie Canada M.A. in Applied Mathematics & Statistics.
Associate Director and Portfolio Manager at Past Founder, President & CIO of Acorn Financial Engineering Major at York
Macquarie Canada. Global Investments. University.

3 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Objective Background
ReSolve Global Adaptive Asset Allocation A brief history of modern portfolio theory
strategies (AAA) harness two of the most
powerful smart beta factors, momentum For most of us, the ultimate goal of investing is to achieve a target wealth (or portfolio
and low beta, to regularly calibrate a income) with the lowest possible risk. The vehicle we use to realize this ambition is
diversified portfolio of global asset classes our investment portfolio. But what mix of investments is most likely to help us realize
in response to material changes in world our ambitions?
markets. AAA mandates are built to target
a specified level of portfolio risk in order Modern Portfolio Theory (MPT) is a Nobel Prize winning mathematical model that
to accommodate investors’ diverse risk relates the expected return and risk of a portfolio to the returns and risks of its
preferences. To manage portfolios to individual constituents, after accounting for the effects of diversification. If thoughtfully
different risk targets, portfolio holdings will applied, it can be a valuable tool in the construction of a reasonably efficient portfolio
often vary across mandates; for example, to meet the needs of most investors.
lower risk mandates would be expected Figure 1. Modern Portfolio Theory (MPT) Efficient Frontier
to hold a larger proportion in bonds on
•••••••
average, while more aggressive mandates •••••••••••••
•••••••••••••
•••••••••••••
•••••••••••••
100%
•••••••••••••
•••••••••••••
would exhibit an equity bias and modest ••
•••
•
••••••••••
•••••••••••••
••
•••
• Equities
•••••••••••••
•••••••••••••
•••••••••••••
•••••••••••••
use of leverage when appropriate. Where •
••••••••••
•••••••••••••
••
•••
•••
•••••••••••••••
•
•••••••••••••
•••••••••••••
necessary, overall portfolio exposure •••
•••
•••
•••
•••••••••••••
•••••••••••••
•••••••••••••
•••••••••••••
•••••••••••••
•••••••••••••
will expand and contract in response to •••••••••••••
•••••••••••••
••••••••••••
•••••••••••••
•••
•••••••
observed changes in portfolio risk. ••••••
•••••••
••••••
•••••••
••••••••••••
•••
•••••••
••••••
•••••••
••••••
•••••••
By combining the strong historical ••••••
•••••••
•• ••••••••••••

•••••••
•••••••
return character of the momentum ••••••••
•••••
••••
•••
factor with global diversification and •••
•••••
•••
•••
risk management, AAA portfolios aim
••••
•••••
•••••
•••••
•••••••
•••••••
to deliver steady growth with specific •••••••
•••••••
•••••••
•••••••
•••••••
•••••••
risk targets and controlled maximum •••••••
100% Bonds

losses, regardless of economic or market

environment.

Source: ReSolve Asset Management, 2015. For illustrative purposes only.

It is useful to think of MPT as a machine. When you feed the machine information
about the assets being considered for a portfolio, it produces new information about
portfolios constructed from those assets. Specifically, MPT takes in information
about the expected return, risk, and correlation for each asset under consideration
for investment. In return, it produces information about all of the portfolios that
maximize portfolio expected returns at each level of portfolio risk. Portfolios which
maximize expected return at each level of risk are said to be ‘efficient’ portfolios, and
the continuum of all portfolios which maximize return at each level of risk is called
the ‘efficient frontier’. Figure 1. provides an illustration of the MPT machine and the
efficient frontier.

4 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Quote Background
Unfortunately, the MPT machine is only as useful as the information it receives about
the assets under consideration. In fact, the nature of the model is such that small
errors contained in the information that is fed into the model are amplified within the
machine. For this reason, Dr. Richard Michaud, a pioneer in portfolio optimization
describes MPT as, “A molehill of garbage in, a mountain of garbage out.”

The fact is, MPT has earned a bad reputation in many investment circles because
it is so sensitive to user error. But this is not the fault of MPT – after all, MPT is just
math. Rather, and perhaps unsurprisingly, MPT doesn’t work very well if you don’t
feed it useful information. It’s a simple case of GIGO: Garbage In → Garbage Out.

The problem is that traditional approaches to asset allocation assume that assets
will always act in accordance with their long-term average behavior. That is, that
markets will deliver steady returns with stable risk, and exhibit consistent relationships
with one another. However, a simple observation of asset class behavior through
history quickly dispels this illusion. Figure 2. demonstrates the wild swings in returns,
“The procedure overuses statistically
volatility, and correlation experienced by stocks and bonds over the past century.
estimated information and magnifies
Figure 2. Ranges of returns, volatility and correlation for U.S. stocks and Treasury
the impact of estimation errors. It is not bonds.
simply a matter of garbage in, garbage Volatility of U.S. stocks and Treasury bonds (1900-2015)

Bonds Stocks
out, but rather a molehill of garbage in, 0.8

0.6

a mountain of garbage out”

Volatility

0.4

0.2

Dr. Richard Michaud 0.0

Jan ‘00 Jan ‘20 Jan ‘40 Jan ‘60 Jan ‘80 Jan ‘00 Jan ‘20

Correlation between U.S. stocks and Treasury bonds (1900-2015)

Correlation

0.5
Correlation

0.0

−0.5

Jan ‘00 Jan ‘20 Jan ‘40 Jan ‘60 Jan ‘80 Jan ‘00 Jan ‘20

Rolling 1-year Return of U.S. stocks and Tresury bonds (1900-2015)

Bonds Stocks

1
Return

Jan ‘00 Jan ‘20 Jan ‘40 Jan ‘60 Jan ‘80 Jan ‘00 Jan ‘20

Source: ReSolve Asset Management. Data from CSI Data. Past Performance is not necessarily indicative
of future results.

5 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Thought Introducing Adaptive Asset Allocation

One of the most important axioms in finance is that the best estimate of tomorrow’s
value is today’s value. This prompts the question: if we can measure the value of
portfolio estimates today (or over the recent past), and they are better estimates over
the near-term than long-term average values, why not construct portfolios based on
this current information? That is, why wouldn’t we choose for our portfolios to adapt
over time based on observed current conditions?

It is worth noting that the overall objective of asset allocation is to deliver the highest
returns per unit of risk, where risk is usually defined in terms of volatility. The ratio of a
portfolio’s return to its volatility is called the Sharpe ratio1, and this is one of the most
fundamental measures of performance in finance .

Putting together the building blocks

In this section, we will walk through a case study of asset allocation methods to
“At root, the objective of a portfolio demonstrate the advantage that accrues from using recent observed portfolio
parameters to regularly adapt portfolios to changing market conditions. Please note
should be to take advantage of all the
that this analysis is for illustration only, and does not reflect the actual methodology
available opportunities. This means for any ReSolve solutions .
seeking out unconventional sources
Our study will consider a portfolio consisting of 10 major global asset classes. Where
of return outside our borders, and in
possible, we draw total return data from Exchange Traded Funds (ETFs). However,
alternative asset classes” prior to ETF inception we use the following sources in order of preference to extend
Michael Philbrick, President the dataset back to 1995: proxy ETFs in the same asset class; passive no-load
mutual funds; underlying indexes; and no-load active mutual funds. The exercise is
meant to be illustrative, but we have done our best to use investible assets where
possible.

• U.S. stocks • International REITs

• European stocks • U.S. 7-10 year Treasuries
• Japanese stocks • U.S. 20+ year Treasuries
• Emerging market stocks • Commodities
• U.S. REITs • Gold
First, consider a naïve investor, with no knowledge of expected relative asset
class performance, risk, or correlation information. A rational investor, lacking any
information to bias his choices, may logically choose to simply hold each asset in the
portfolio in equal weight. Going back to 1995, holding our basket of assets in equal
weight, and rebalancing monthly, an investor would have experienced the following
portfolio growth profile [Exhibit 1]. Note that all risk statistics assume end-of-month
values.

1 Technically, the Sharpe ratio measures the ratio of excess returns to volatility, where returns are measured
6 PA G E in excess of the risk free rate. However, for simplicity all Sharpe ratios in this brochure are simple ratios of
returns / volatility.
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Putting together the building blocks

Exhibit 1: 10 Assets, Equal Weight Rebalanced Monthly (1995-2015)

Equal Weight

4.00

2.83
Equity

2.00

1.41

1.00

Jan ‘95 Jan ‘00 Jan ‘05 Jan ‘10 Jan ‘15

Source: CSI Data, ReSolve Asset Management. Simulated performance.*

Jan 1995-Dec 2015

Equal Weight
Compound Return 7.6%
Volatility 11.4%
Sharpe Ratio 0.7
Maximum Drawdown -37.2%
Positive Rolling Years 77.6%
Growth Over $1 $4.62

Before we move on, let’s review how to interpret the chart and data table from
Exhibit 1. The chart shows the growth of $1 invested in the strategy on January
1st, 1995 through December 2015, where it has grown to $4.62. It offers a visual
representation of the growth in the portfolio through time, which is summarized
in the table below the chart. For example, the compound returns, which took the
portfolio from $1 twenty years ago to $4.62 today, equates to growth of 7.6% per
year.

The chart is also informative because you can see the path the portfolio took to
get from $1 to $4.62, which included a big dip about 2/3 of the way along in 2008.
From visual inspection, you can see that the portfolio lost about 40% of its value in
the 2008-2009 bear market. This is confirmed by glancing at the Max Drawdown
row in the table, where we learn that in fact the maximum drawdown was a drop of
37.2% from peak to trough.

* Past results are not necessarily indicative of future results. It is expected that the simulated
7 PA G E performance presented in this document will vary as a result of both improvements to our
simulation methodology and the underlying data sets used for simulation. Please review the
disclosures at the end for more information.
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Please also note the portfolio volatility and simple Sharpe ratio. The volatility of the
Thought
portfolio over the entire period averaged 11.4%, which means the simple Sharpe
ratio was 7.6% / 11.2% = 0.7. Lastly, we provide the percentage of all 12-month
periods where an investor would have experienced positive absolute returns. In this
case, an investor would have seen positive performance over 77.6% of rolling years.

Now let’s assume that an investor believes he has some information only about each
asset’s risk, but no knowledge of returns or correlations. This is useful because in
the equally weighted case above, the portfolio’s risk is overwhelmingly determined
by higher volatility assets in the portfolio, like stocks, REITs and commodities. Low
risk bonds have virtually no opportunity to deliver their diversification properties
because they are overwhelmed by equity risk. We learned from Exhibit 1 how that
concentrated risk can manifest in terms of investor experience – recall that 40% drop
in 2008.

If our goal is to ensure the portfolio is truly more balanced, so that each asset class
has an equal opportunity to contribute both returns and diversification, perhaps lower
“[A]n asset’s ability to diversify a volatility assets should have greater weight in the portfolio, and higher volatility assets
should have lower weight. We express this logic in Exhibit 2, where we observe the
portfolio is a function of its volatility,
actual volatility of each asset in the portfolio over the past 60 days, and adjust the
and its correlation with the portfolio. allocations at each monthly rebalance period so that each asset contributes the
If assets are held in equal weight, same daily volatility to the portfolio.
high volatility assets like stocks will
overwhelm the diversifying properties
of lower volatility assets like bonds and Exhibit 2: 10 Assets, Volatility Weighted Rebalanced Monthly (1995-2015)

inflation protected securities.” Equal Weight Risk Weight

Adam Butler 5.66

4.00

2.83
Equity

2.00

1.41

1.00

Jan ‘95 Jan ‘00 Jan ‘05 Jan ‘10 Jan ‘15

Source: CSI Data, ReSolve Asset Management. Simulated Performance.*

* Past results are not necessarily indicative of future results. It is expected that the simulated
8 PA G E performance presented in this document will vary as a result of both improvements to our
simulation methodology and the underlying data sets used for simulation. Please review the
disclosures at the end for more information.
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Quote Jan 1995-Dec 2015

Equal Weight Risk Weight
Compound Return 7.6% 8.0%
Volatility 11.4% 8.7%
Sharpe Ratio 0.7 0.9
Maximum Drawdown -37.2% -22.5%
Positive Rolling Years 77.6% 83.8%
Growth Over $1 $4.62 $4.98

By simply sizing each asset in the portfolio so that it is expected to contribute the
same amount of risk, the return delivered per unit of risk (Sharpe ratio) increases
from 0.7 to 0.9 relative to the equal-weight portfolio. Of course, this improvement
is mostly a function of less overall portfolio risk, as the returns are very similar. Not
surprisingly, less volatility also means more consistent returns (84% positive years)
and lower maximum drawdowns (-23% vs. -37% for equal weight). And we get all
of this benefit simply from preventing the lunatics (stocks) from running the asylum
(portfolio).
“The source of the long-term positive
Exhibit 2 isolated the effect of risk management on portfolio outcomes. In other
performance is better diversification, in
words, we observed the results from playing a little portfolio defense. Now let’s put our
particular making assets like bonds and offense on the field by introducing information about expected returns. To generate
commodities count as much, but not our return estimates, we will draw on one of the most widely validated properties of
markets: momentum. The momentum effect has been observed across most global
more than, equities.”
markets*, and describes the phenomenon where assets that have performed well
Cliff Asness recently tend to continue to perform well over the next few weeks.

To harness the momentum effect, each month we will sort assets by their returns
over the past six months. Those assets that have delivered better than average
returns will be held in the portfolio for the next month. Assets are then re-sorted and
portfolios are reformed with the top assets each month through time. In addition, we
will hold these top assets so that they contribute equal portfolio volatility using the
same technique we used for Exhibit 2. The results are in Exhibit 3.

* Alex Greyserman & Kathryn Kaminzki: “Trend Following with Managed Futures: The Search for Crisis Alpha”

* Past results are not necessarily indicative of future results. It is expected that the simulated
9 PA G E performance presented in this document will vary as a result of both improvements to our
simulation methodology and the underlying data sets used for simulation. Please review the
disclosures at the end for more information.
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Exhibit 3: 10 Assets, Top 5 By 6-Month Momentum, Volatility Weighted, Rebalanced

Monthly (1995-2015).

Equal Weight Risk Weight Momentum

16

Equity 8

Jan ‘95 Jan ‘00 Jan ‘05 Jan ‘10 Jan ‘15

Source: CSI Data, ReSolve Asset Management. Simulated Performance.*

Jan 1995-Dec 2015

Equal Weight Risk Weight Momentum
Compound Return 7.6% 8.0% 14.1%
Volatility 11.4% 8.7% 10.4%
Sharpe Ratio 0.7 0.9 1.3
Maximum Drawdown -37.2% -22.5% -12.6
Positive Rolling Years 77.6% 83.8% 95.4%
Growth Over $1 $4.62 $4.98 $15.73

It’s clear that adding a momentum tilt to portfolio holdings substantially improves
risk-adjusted performance, with a major boost to returns and a large reduction in
drawdowns. The Sharpe ratio jumps from 0.9 for risk weighting on its own, to 1.3
with risk-weighted momentum. Returns rise to 14.1% per year, with a manageable
increase in volatility. In fact, since drawdowns were smaller, we can deduce that most
of the extra volatility was observed on the upside.

So far, we have observed a step-by-step improvement as we introduced methods

to better distribute portfolio risk and harness the momentum factor. Our one missing
ingredient is diversification. We have not taken any steps to account for different
asset correlations as we construct portfolios.

Remember that diversification has the effect of lowering the risk of a portfolio because
some assets in the portfolio are ‘zigging’ while others are ‘zagging’. Importantly, two
assets can have a low correlation, and therefore effectively diversify each other, even
while both assets are moving in the same average direction. That is, two assets can
both be rising in price on average, but be negatively correlated.

* Past results are not necessarily indicative of future results. It is expected that the simulated
10 PA G E performance presented in this document will vary as a result of both improvements to our
simulation methodology and the underlying data sets used for simulation. Please review the
disclosures at the end for more information.
ADAPTIVE ASSET ALLOCATION www.investresolve.com

To understand why, consider Figure 3, which shows two securities with positive
Thought
return trajectories, but that move in opposite directions at each period. As a result,
the two securities have perfect negative correlation, while the portfolio of the two
securities moves in a straight line, up and to the right. In this way, two risky assets
with equal volatility and perfect negative correlation can be combined to form a
portfolio with zero volatility and a positive return.

Figure 3. Negatively correlated assets with positive returns.

Asset 1 Asset 2 Portfolio

0.07
0.06
0.05
Portfolio Value

0.04
0.03
0.02
0.01
“Diversification has the effect of 0
0 1 2 3 4 5 6 7 8 9 10 11 12
lowering the risk of a portfolio because
Months
some assets in the portfolio are
Source: ReSolve Asset Management. For illustrative purposes only.
‘zigging’ while others are ‘zagging’.
Importantly, two assets can have a low Of course, in practice there are almost never two assets with perfect negative
correlation, but MPT provides a framework to assemble assets with low correlation
correlation, and therefore effectively
in order to maximize portfolio returns while minimizing volatility. In fact, we are able
diversify each other, even while both to find the portfolio with the highest expected returns at any specified level of risk.
assets are moving in the same average Since we are using the momentum factor to find assets with the highest expected
returns, our process will find portfolios with the highest momentum achievable at our
direction.”
target level of volatility.

In Exhibit 4., we bring all of the concepts discussed so far together in order generate
portfolios with strong momentum, and which account for asset class risks and
correlations. Specifically, portfolios are reformed each month from assets in the top
half by momentum across multiple historical periods, such that they produce the
maximum momentum achievable with 8% portfolio volatility.

11 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Exhibit 4: 10 Assets, Top Half by 1, 3, 6, 9 and 12 Month Momentum, Mean-Variance

Quote Target 8% Volatility, Rebalanced Monthly (1995-2015).

Equal Weight Risk Weight Momentum Mean−Variance 8%

16

8
Equity

Jan ‘95 Jan ‘00 Jan ‘05 Jan ‘10 Jan ‘15
“The riskiest moment is when you’re Source: CSI Data, ReSolve Asset Management. Simulated Performance.*
right. That’s when you’re in the most
Jan 1995-Dec 2015
trouble, because you tend to overstay
Equal Weight Risk Weight Momentum Mean-
the good decisions. So, in many ways, Variance
8%
it’s better not to be so right. That’s what
Compound Return 7.6% 8.0% 14.1% 15.4%
diversification is for. It’s an explicit Volatility 11.4% 8.7% 10.4% 9.3%
recognition of ignorance. And I view Sharpe Ratio 0.7 0.9 1.3 1.6
diversification not only as a survival Maximum Drawdown -37.2% -22.5% -12.6 -7.5%
strategy but as an aggressive strategy, Positive Rolling Years 77.6% 83.8% 95.4% 98.3%
Growth Over $1 $4.62 $4.98 $15.73 $20.27
because the next windfall might come
from a surprising place.” Recall that our naïve equal weight portfolio delivered just 7.6% returns with volatility
Peter Bernstein of 11.4% and a maximum peak-to-trough drawdown of almost 40%. After making
thoughtful use of MPT by introducing adaptive momentum, volatility and correlation
factors we observe an almost 8 percentage point boost to returns, with lower risk.
As such, the Sharpe ratio is boosted by over 100%, while the maximum drawdown
observed over 20 years was under 10% (with end of month observations).

ReSolve’s Advanced Signal Extraction Technology (A.S.E.T.)

In practice, ReSolve employs a significantly more robust implementation of

these concepts, which helps drastically stabilize the signal-to-noise ratio across
momentum, volatility and correlations. ReSolve’s edge lies in our Advanced Signal
Extraction Technology (A.S.E.T.), a proprietary quantitative process that applies
best practices from information science and machine learning with the goal of
producing meaningfully more reliable signals for live trading.

* Past results are not necessarily indicative of future results. It is expected that the simulated
12 PA G E performance presented in this document will vary as a result of both improvements to our
simulation methodology and the underlying data sets used for simulation. Please review the
disclosures at the end for more information.
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Thought Enhanced returns the right way

We’ve seen how combining diverse global asset classes to maximize diversification
using dynamic estimates of portfolio variables leads to resilient portfolios across
most environments. However, up until now we have presented just one portfolio,
with one risk and return profile. While this portfolio may meet the needs of a large
portion of investors, many investors have a preference for higher returns, and can
tolerate more risk. Fortunately, it’s easy to meet the objectives of almost any investor
by employing the Capital Market Line (CML).

Dr. William Sharpe received the Nobel Prize in 1990 for his theory on asset pricing,
which he originally proposed in 1962. Central to his theorem was the proof that
everyone should own the most diversified portfolio. Then, since investors can borrow
or lend at a rate below the return on this portfolio, investors should scale exposure to
the portfolio up or down to meet individual return targets. The line that describes the
relationship between risk and return at each level of exposure is the CML.

Figure 4. provides an example of this concept. First consider the blue curve, which
represents a typical ‘efficient frontier’ approach to portfolio construction. Under this
framework, an investor who wishes to increase his returns must resort to taking a
“By combining good defense (risk highly concentrated position in the highest returning assets. Most often this means
allocations) with strong offense investors must concentrate their risk in equities, and sacrifice diversification. In
contrast, Sharpe asserted that it is preferable to preserve diversification by holding
(momentum emphasis) and the Nobel the most diversified portfolio at all times, but scaling exposure to this portfolio using
Prize winning concepts of MPT, it is leverage. By borrowing at a low rate to invest in a diversified portfolio with higher
possible to deliver strong returns in returns, it is possible to achieve a return similar to a concentrated portfolio in equities,
but at substantially less risk. In fact, it is possible to achieve virtually any return or risk
most market environments.”
target by moving up or down the CML with the required amount of leverage.
Figure 4. Efficient frontier and the Capital Market Line

Source: ReSolve Asset Management, 2015. For illustrative purposes only.

13 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Thought
ReSolve’s higher volatility target mandates employ the CML by using leverage
thoughtfully to achieve a higher target of risk and return. However, since portfolio
risk changes through time in response to changes in asset risks and correlations,
ReSolve scales leverage exposure dynamically with the goal of maintaining the target
risk across all market environments. As a result, in highly volatile markets portfolio
exposure may be less than 100%, implying a substantial holding in cash. On the
other hand, the Strategy may require the use of different levels of leverage to meet
the target risk during periods of low volatility.

As such, by dynamically scaling the diversified Adaptive Asset Allocation portfolio

to target higher risk, the Strategy should be expected to deliver higher returns
commensurate with the risk taken.

ReSolve’s Optimal Volatility Range (R.O.V.R.)

While the risk targeting process described thus far is theoretically intuitive, in practice
accurately estimating portfolio volatility is a complex endeavour that requires advanced
quantitative methods. As a result, we apply a process we call the ReSolve Optimal
“By combining good defense (risk Volatility Range (R.O.V.R.), a proprietary quantitative tool specifically designed to
allocations) with strong offense more precisely estimate and manage portfolio exposure to the stated risk mandate.
This unique tool allows ReSolve to more closely deliver on the investor experience
(momentum emphasis) and the Nobel they signed up for independent of market conditions.
Prize winning concepts of MPT, it is
possible to deliver strong returns in The Next Generation of Portfolio Management
most market environments.”
The studies presented above illustrate the benefit of creating balanced portfolios of
major global asset classes which adapt through time to changes in risk, correlations
and momentum. It should be clear that by combining good defense (risk allocations)
with strong offense (momentum emphasis) and the Nobel Prize winning concepts of
MPT, it is possible to deliver strong returns in most market environments.

14 PA G E
ADAPTIVE ASSET ALLOCATION www.investresolve.com

Disclaimer

Confidential and proprietary information. The contents hereof may not be reproduced or disseminated without the express written permission of ReSolve Asset Management Inc.
(“ReSolve”). ReSolve is registered as an investment fund manager in Ontario and Newfoundland and Labrador, and as a portfolio manager and exempt market dealer in Ontario, Alberta,
British Columbia and Newfoundland and Labrador, as well as a Commodity Trading Manager in Ontario. In the U.S. ReSolve is registered with the United States Securities and Exchange
Commission as a Non-Resident Investment Adviser.

ReSolve is also registered with the Commodity Futures Trading Commission as a commodity trading advisor. This registration is administered through the National Futures Association
(“NFA”). Certain of ReSolve’s employees are registered with the NFA as Principals and/or Associated Persons of ReSolve if necessary or appropriate to perform their responsibilities.
ReSolve has claimed an exemption under CFTC Rule 4.7 which exempts Resolve from certain part 4 requirements with respect to offerings to qualified eligible persons.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

Forward-Looking Information. This presentation may contain “forward-looking information” within the meaning of the Securities Act (Ontario) and equivalent legislation in other provinces
and territories. Because such forward-looking information involves risks and uncertainties, actual results of the funds or accounts may differ materially from any expectations, projections
or predictions made or implicated in such forward-looking information. Prospective investors are therefore cautioned not to place undue reliance on such forward-looking statements. In
addition, in considering any prior performance information contained in this presentation, prospective investors should bear in mind that past results are not necessarily indicative of future
results, and there can be no assurance that the funds or any account will achieve results comparable to those discussed in this presentation. This presentation speaks as of the date hereof
and neither ReSolve nor any affiliate or representative thereof as-sumes any obligation to provide any recipient of this presentation with subsequent revisions or updates to any historical or
forward-looking information contained in this presentation to reflect the occurrence of events and/or changes in circumstances after the date hereof.

General information regarding hypothetical performance and simulated results. These results are based on simulated or hypothetical performance results that have certain
inherent limitations. Unlike the results in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these
results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject
to the fact that they are designed with the benefit of hindsight. No representation is being made that any account or fund will or is likely to achieve profits or losses similar to those being
shown. The results do not include other costs of managing a portfolio (such as custodial fees, legal, auditing, administrative or other professional fees). The information in this presentation
has not been reviewed or audited by an independent accountant or other independent testing firm. More detailed information regarding the manner in which the charts were calculated is
available on request. Any actual fund or account that ReSolve man-ages will invest in different economic conditions, during periods with different volatility and in different securities than
those incorporated in the hypothetical performance charts shown. There is no representation that any fund or account will perform as the hypothetical or other performance charts indicate.

© 2015 ReSolve Asset Management Inc. All rights reserved.

15 PA G E
Get in touch

ReSolve Asset Management

1 Adelaide Street East
Suite 2000
Toronto, Ontario M5C 2V9
T: 416-572-5474
TF: 855-446-4170

www.investresolve.com