Lone Wolf

Asymmetric
"If you can think it, it can happen,
so prepare, prepare, prepare."

Lone Wolf Asymmetric differs from other investment managers because

of its occasional divergences from conventional investment theory
 Lone Wolf Asymmetric

Lone Wolf Asymmetric

"If you can think it, it can happen, Alpha is an
so prepare, prepare, prepare." Option

Lone Wolf Asymmetric is an emerging hedge fund We firmly believe in
manager that creates directionally oriented trades active management or
more precisely "active
through "asymmetric" strategies using options. We have
risk management."
an absolute return focus that is active, dynamic and
Market participants
protective of its investors' capital. While, the asymmetric
have different objectives,
option strategies limit the downside they do allow for time horizons, skill and
unlimited upside gains. This combination of smaller other risk constraints
losses and bigger gains then allows for better and faster that can produce
inefficiencies.
compounding of returns so that our investors can achieve
their goals and objectives. What this means is that
certain inefficiencies can
Lone Wolf Asymmetric has reviewed a variety of be exploited by savvy
investment theories and believes that most are outdated investors who are
willing to reflect and
or aren't reflective of real world workings. Instead, it has
reconsider how the
blended the strengths of current derivative risk investment process
management with investing to form a systematic option works.

process that is robust enough to handle most real world We believe options can
situations. We believe Asymmetric Option Investing is the provide investors with a
tool that is flexible, self-
pathway to the future.
adjusting, and can be
Unfortunately, we are not ex-Goldman Sachs partners tailored to any investor's
individual risk appetite.
with unlimited resources to back us. Instead, we are
hardworking, knowledgeable traders who have honed
our skills over a 35+ year career competing against the
Goldmans of the world and have continually beaten

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them. We believe Alpha can be found by combining state

of the art risk management with our Asymmetric Option
Investing process.
Harry
We see a new wave of managers coming into their own. It Markowitz &
will be tough for institutional investors to make the MPT

decision as who to fund. But the old guard will be
replaced. The new managers will be much more nimble, What is your
thoughtful and innovative going forward. definition of
risk?
They will revise or replace existing ideas and will lead the
investment industry into a new era. Institutional investors
would be smart to seed a few of these more promising
managers to get in on the ground floor. Lone Wolf Is it any variance
Asymmetric wants to lead this change. from an

Flipping the Investment Process on its Head

expected return -
be it either up or
We create directional "asymmetric" strategies by
down?
purchasing options. Rather than using options to hedge a
position, we use them to initiate our investment positions.
We flip the whole investment process around. And it
brings everything back to what a real hedge manager Or are you more
should do - limit losses while seeking unlimited gains. concerned about
See the Barry Ritholtz article below about missing the best containing the
and worst days of the market and how it impacts the down-side risk?
compounding of your returns.

Our asymmetric option investing process compounds

gains faster by limiting losses. This we believe is
equivalent to when Sid Bass wanted to rebuild his family's
wealth. Back then he brought in Richard Rainwater. To

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accomplish this feat, Rainwater's idea was to re-energize

"dormant or dead money" through "intelligent investing in
a controlled fashion". Asymmetric investing does this
Testing before
through prudent risk management policies and the
Using
derivative instrument's leverage.

Not all investment

advice is good or
Origins of Lone Wolf Asymmetric
applicable all the
LWA has evolved over my 35+ year career of trading and time.
managing risk. During those years, I have questioned most
if not all of those modern finance and Wall Street tenets. It
was seeing those things that worked in practice rather than In fact sometimes
in theory that had me revising a lot of my thinking on how good advice
to manage risk and investments. Therefore, Lone Wolf doesn't apply to
Asymmetric is my attempt to take those years of experience everyone.
and adaptations to financial theory and show the world that
"there is a better way to manage money and risk".
On Indexing
We understand that we are unique in our investment style Warren Buffett has
and that a certain amount of education must be done to observed that "in
convince investors of our merits. We don't use options as a any sort of a
second leg to another strategy but instead it is the primary contest-financial,
investment vehicle. We've heard the skepticism of having a mental or physical-
purchased options strategy but if you reviewed option it's an enormous
theory you wouldn't be. Most skeptics haven't figured out advantage to have
that their probabilities of success are lowered because their opponents who
directional opinions haven't been back-tested and therefore have been taught
the correct parameters for their options are a mere guess. that it's useless to
That is a major difference between us and the others. We see even try."

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their choice of options as kind of "seat of the pants" as to

which option they'll buy and which expiry date they'll
choose. To us, that seems to reek too much of a cowboy or
Warren Buffett
gun-slinger mentality to be successful over the long-term.
and Investing
Instead, we use our back-tested system signals, with their
known parameters to give us an "edge" that can be
I want
replicated and consistently applied to the markets.
protection
The key was coming up with a logical system to employ
from the
this asymmetric attribute. When I partnered with Ralph
Vince we combined our strengths - my option and risk downside but I
management background with his computer programming want as much
and portfolio management skills. Ralph worked for George
upside as
Soros at one time and was the lead programmer that created
Trade Station - a system to back-test trade ideas. Let me
possible.
simplify the process.

1. Overall, we create asymmetric strategies which give

investors a predetermined known worst-case Asymmetric
downside level (which is the option premium cost) Trading
while providing potential for unlimited gains. We
believe this asymmetry is what investors really want. strategies
2. Firstly, we use back tested technical analysis trade combine risk
signals to generate the asset's buy or sell signals. This
management
generates a universe of potential trade candidates
3. We compare the potential trade candidates with the with
current macro-economic environment. We rank them investment
from most favorable to the least favorable given the
current environment. After the potential universe of
management
trade candidates is finally willowed down to a select
few trades, we look at the trade signal data.
4. We then use the back-tested trade signal data to
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provide us with the needed option parameters of

how far and how fast the move will occur.
5. We price a variety of options on the intended
target(s). The prices reflect the current market Warren Buffett
environment. and Investing

6. We then re-price the same options now adjusting for
how far and how fast the move will occur. The studies are
7. We compare the before and after options and their in and the
prices to see which option or option strategy is
firms' with the
expected to produce the most gains.
8. We execute the option(s) orders. most skill
9. We do follow-up strategy risk management when know how to
needed. manage
The ideas behind the strategy come from a couple of market
derivatives
factors that were recognized long before factor investing
became fashionable. The strategy is based on value and
and leverage
momentum. In our case, value is determined by the best.
overbought and oversold technical indicators. The
momentum occurs when the short term indicator crosses
either above or below the longer term indicator and you get
The world is
a range expansion. An important point is to match the entry
signal to a specific time period. Buying haphazardly with changing and
any investment without a specific time perspective in mind new ideas and
lowers your overall rate of success and rate of return. approaches
When you research the system you'll see it blends a will meet the
remarkable amount of ideas into it. Ideas such as our
challenge.
modified investing factors, regression to the mean, flaws in
Black Scholes option model, definitions of volatility and
risk, technical analysis, fundamental analysis,

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diversification and correlations, skew and kurtosis, along with leverage and
derivatives usage.

When conditions line up, we are short-term opportunistic traders. Normally

from one month to as much as six months and then we are out of the market
and looking for new signals that match the new current macro-environment.
We think this is smart as it keeps you focused and forces you from getting
complacent and holding onto losers. We do this for additional reasons:

1. We are long term investors who link short-term views together in

economic environments that we understand. We believe trying to forecast
what the world will look like in three to five years or longer is impossible.
We try and stay in sync with what we do know. In the time frame that we
invest, we know what elections are coming, what key economic releases are
going to be released with their market expectations, we understand how
the markets are positioned, what central banks are doing and where
inflation/deflation is headed.

2. We try and keep surprises to a minimum that is one reason why we use
options. But the other is the leverage that can be gained through the
options. We are not like LTCM in which we are short a lot of things as it
goes against us. Instead we are on the right side of calamity since we have
the knowledge that the worse that could happen is that we lose the
premium. And since we are long volatility we can benefit from chaos as
opposed to most other hedge funds that are short volatility

3. We play very good defense. Our back-tested strategies give us a pretty

good feel for what a good trade looks like and when a trade looks bad.

4. The investment process is repeatable and scalable. Thus, its edge and
leverage can be tailored to specific risk appetite levels given our position
sizing algorithms. Again because of the leverage we can under trade, under
trade, under trade and still achieve above average returns.

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5. Time is a precious asset that most investment managers or investors don't

understand. You're investing with us because we have the skill to make the
right choices while you concentrate your own time on your life's ambitions.
Life has its ups and downs (my brother died of pancreatic cancer at an
early age) and you may never know when you or your family needs to be
liquid. Waiting for a languishing investment to come through is very
ineffective. Your money should be seeking the best opportunities at any
particular moment in time

We at Lone Wolf Asymmetric are concerned with the Systemic factors that
impact global markets or at least country markets and see opportunities from
shifting among them. We believe that understanding and following these
monster tides ensures a better probability of success than some individual factor
related to a particular company or industry. We believe that understanding what
sectors /assets are impacted the most, makes it a little easier to generate
profitable and more stable returns. According to a Santander report, the General
market performance is typically responsible for approximately 70% of equity
returns, while 10% is due to sector selection and the remaining 20% due to stock
picking. Again, we are not just involved in global equities, but bonds, currencies
and commodities. Basically any asset that is optionable is a potential candidate.

Using options to invest has many advantages over investing in cash markets.
Options provide leverage and an ability to take a view on volatility as well as
direction. However, investing in options is more complicated than investing in
other assets, as a strike and expiry need to be chosen. This can be seen as an
advantage, as it enforces discipline in terms of anticipated return and ensures a
position is not held longer than it should be. We choose the appropriate strategy,
strike and expiry based on a process than can be replicated. We also understand
the difference between delta and the probability an option ends up in-the-money.

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Brief Bio of Dave Stasko

Just to introduce myself I am a University of Pennsylvania graduate. A few

years ago, I partnered with Ralph Vince a well-known author of several books on
portfolio management and portfolio mathematics, trader and computer
consultant with George Soros to form First October Trading. We designed an
options trading system that was the fore-runner to today's current system. Back
then, Heinold Commodities fund's allocator stated that we didn't correlate to
anyone. Even after wrap-fees of 6%-8% we were generating around 16% returns.
Unfortunately, Heinold was bought out before we could establish ourselves.

Over the years, I have started and run currency option trading desks at HSBC-
Marine Midland, one of the first currency options desks in the world,
Manufacturers Hanover Trust and British Petroleum. In addition, I helped start
FX Concepts initial foray into the funds management business. FX Concepts later
became one of the largest currency hedge funds in the world.

I learned a lot of my trading skills from the likes of Mike Marcus, Bruce Kovner
and others at Commodities Corporation and I came in second to Paul Tudor
Jones in their Trader Evaluation Program (TEP) with a 300% return.

I am enclosing additional pieces for your review. They outline our process and
methodology for investing. I hope that you take a few moments to read the piece
about "time being a precious asset that must be managed well" and conclude that
partnering with Lone Wolf Asymmetric is a smart decision that can fulfill many
an investor's niche.

Best Regards
Dave Stasko
Lone Wolf Asymmetric

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Lone Wolf Asymmetric believes its strategies can unleash the potential that you
see in the graph below.

The graph comes from an article that Barry Ritholtz wrote. There are a few
interesting observations about this data set:
Classic Buy & Hold nets $324,330.15
The 10 best days account for 50% of the buy and hold performance
(roughly 0.2% of the days from 1993 to August 2010).
Missing the 10 Best Days gives up more than 50% of the Buy & Hold
performance: $156,354.12
If you manage to avoid the 10 Worst Days, your portfolio more than
doubles the Buy & Hold performance: $692,693.90
The lesson I take from this: It is great if you can avoid the major down days, but
only if you can do so in a way that does not have you missing the major up
days.
If you manage to avoid all the Worst days, but miss all of the Best days too, then
your portfolio performance will be nearly the same as straight Buy & Hold (but
with additional taxes and commissions paid).
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