The Shadow Banker’s

Market Crash Survival Guide

How to Protect Your Investment Portfolio from Market

Crises While Generating Above-Market Returns
Without Buying Mutual Funds, Annuities or Real Estate

ADAGIO INSTITUTE , INC © 2019 All Rights Reserved

Disclaimer

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Preface

What is a Shadow Bank?

The type of banks most people are familiar with are retail banks like Bank of America,
Chase and Wells Fargo. Retail banks take deposits and write consumer loans like
mortgages and auto loans. Shadow banks, on the other hand, operate behind the scenes
and don’t have nearly the regulatory burden to contend with. They create debt and equity
capital across the global financial system. Investment banks like Goldman Sachs and
Morgan Stanley, private equity and hedge funds are a few examples of shadow banks. And
since shadow banks aren’t subject to nearly the regulation retail bank are, you can
relatively quickly and easily start you own as a properly structured private fund, if you are
so inclined.
Step 1: Measure Risk-Adjusted Performance

Stories, Relationships, and Feelings

Every investor—from the guy who bets on physical currency by hiding it under his mattress
to Warren Buffet—is concerned with risk. Somewhat surprisingly though, despite the fact
that the vast majority of people are risk averse, very few have any idea what risk actually
means—this group includes many, if not most, financial professionals (most financial
advisors are little more than well-credentialed salesmen). And ironically, despite retail
investors’ often stated aversion to risk, they tend to solely focus on the projected return of
an investment, seldomly (read never) considering the risk associated with achieving the
expected return in any meaningful way. Heuristics and intuition based upon anecdotal
considerations repeatedly fail as a means to effectively manage financial risk. The takeaway
here is that risk is not a story; it's not a relationship; it's not a feeling. Risk is a number: it's
the probability of loss weighted by the potential degree of that loss. Because financial
assets are measured in quantifiable units such as dollars over time, risk is a number that
can be calculated. Shouldn’t you demand a reliable, objective measure of the investments
that represent your life savings?
Step 1: Measure Risk-Adjusted Performance (continued)

Financial Crises
Unfortunately, when people actually do begin to think about risk in meaningful terms, they
tend to do so with a filtered or short term memory. Almost everyone, including the
financial advisor crowd, sweep historical crises like that of 2008 under the rug as if it was
an inevitable result that everyone lost big and that it was a one-time event. Financial crises
would be bad enough if they were a once in a lifetime event, but the reality is they’re not.
Here’s a timeline representing the financial crises we’ve experience over the past 30 to 40
years. As you can see, they happen with some regularity — about once every ten years with
a trend of ever increasing magnitude, which means we’re about due for another. The
fundamentals of the economy have been pointing to the next big one for a while. When
measuring risk, a full market cycle of historical data must be taken into account for the
numbers to be meaningful, which means you can’t ignore the losses associated with 2008.
Step 1: Measure Risk-Adjusted Performance (continued)

Traditional Financial Markets & Allocations

Most financial advisors adhere to a very traditional asset allocation model built entirely
upon public securities. Outside of the fact that a set of relatively vague, qualitative criteria
govern the literal value of their clients’ life work, the substance upon which those models
are predicated is a set of assets completely dependent upon schizophrenic secondary
markets. What’s more remarkable is that the gross limitations of what effectively boils down
to the sales function for a pump & dump business model are on full display in all the FINRA
texts, albeit in polished vernacular as a de facto disclaimer: market risk is undiversifiable.
To give you an idea about what you’re up against in the capital markets from a
performance perspective, below is a sample of traditional portfolios made up of publicly-
traded stocks, bonds, mutual funds and money market instruments. As you can see, the
“conservative” portfolio lost almost 20% in its most down year… how can that possibly be
deemed safe in any terms!?! Aggressive growth averages sub 10%!?! You can lend on
conservatively valued real estate with a 35% equity cushion and do better than that—
without taking a big hit in the down years! This is about as good as it gets when you go to
your financial advisor and have him construct an investment portfolio for you based upon
your “individual” risk appetite and growth needs—pick a box:
Step 1: Measure Risk-Adjusted Performance (continued)

Annuities—What’s Hidden Behind the “Risk-Free” Guarantee?

If you’re unfamiliar with annuities, they work like this: you give an insurance company your
money and in return they pay you an income stream—usually for the rest of your life—but
the cost of such guaranteed income is high… very high. Ever wonder why financial
salesmen push annuities so hard? Annuities pay extremely high commissions—often 7% of
the total amount you invest, or higher. So, if you were to buy a $200,000 annuity, the
salesperson may take home around $14,000 up front. So, why do people even consider
annuities? Well, they provide downside protection. If the market takes a hit, your principal
is guaranteed against losses, but the cost of that protection far outweighs the benefit. It’s
true that if the market falls 20%, you won’t lose any principal with an indexed or fixed
annuity, but if the market soars 20%, you may make as little as 4%… and that’s only if the
insurance company remains solvent, which is not guaranteed. Remember AIG in 2008? If
you don't, they had to be bailed out with TARP. There are countless different types of
annuities with an endless combination of features, but for every bad feature you eliminate
with one type, you'll pick up a different bad feature with another. While it is true that
annuities might be appropriate for some people in some circumstances, there are
probably better options to consider. As the industry saying goes, "Annuities are sold, not
bought.” Don’t be sold.
Step 1: Measure Risk-Adjusted Performance (continued)

Real Estate Does Not Manage Itself

Real estate investing, and by extension, crowdfunding has emerged as THE alternative to
stocks, bonds and mutual funds.  Real estate asset managers, including crowdfunding
sponsors like Cardone Capital, Patch of Land, RealCrowd, Fundrise, RealtyMogul and
Crowdstreet, sell the idea that because you can touch real estate, it’s safe. But since 1999,
when the Fed injected itself into the market by subsidizing mortgage interest rates, real
estate has become just another asset class subject to the boom and bust cycle. Remember
2007 to 2011? I’ve been a professional investor for over a decade and a half in both
traditional and alternative assets, and I have never seen one piece of real estate lease,
value, sell, or manage itself. The performance of real estate is completely dependent upon
the quality of its management. How did the real estate asset managers that are touting
their success today do between 2007 and 2011? I’ll give you a hint, they were either losing
their ass or they weren’t even in the game at that time. Today, real estate under its current
management culture has become a glorified stock market, but without the liquidity—
subject to the same boom and bust cycle. Guys like Grant Cardone try to sell the dumb
money on cash flow. Real estate was cash flowing back in 2008 and how did that work out
for real estate investors? It takes a lot of cashflow to offset a 27% drop in value. How many
months of $5,000 rent checks does it take to recoup a $350,000 loss in value?
Step 1: Measure Risk-Adjusted Performance (continued)

Quantitative Risk Analysis—Measuring Historical Performance

How do others earn your trust? The answer is historical performance: the longer you’ve
known someone who has been consistently honest with you, the more you trust them.
Financial risk measures are based upon the same epistemology. Risk is measured as the
degree to which something has historically changed; in finance we’re concerned with
changes in market values, what is referred to as price volatility—the greater the volatility, or
change, in the historical price of an asset, the riskier it is said to be. The study of computing
probabilities is the purview of the mathematical branch statistics and probability theory,
and herein lies the reason so few people understand risk: people tend to dislike math. It’s
okay if you don’t follow the numbers above, but if you have one, your financial advisor
should be able to. The reality, however, is that whatever financial advisor you find likely
passed all the FINRA exams—which are the licensing exams for financial professionals—
without understanding these numbers, and he therefore doesn’t understand the risk he’s
exposing your life savings to. Above you’ll find the risk-adjusted performance measures
(with the mathematical expressions for each) of both the stock and REIT markets as
expressed by the S&P 500 and MSCI US REIT Indices. You can fairly easily look-up what
each measure means in qualitative terms.
Step 2: Source Superior Risk-Adjusted Performance

Inefficient Markets, Quantitative Trading Strategies & Derivatives

An efficient market is one where market prices reflect all available, relevant information.
One example of an efficiently traded asset class would be stocks where endless resources
and capital are poured into the market. An inefficient market is one where an asset’s
market price does not reflect its true value. This is usually caused by inefficiencies in
information and/or capital flows. An example of an inefficient market would be small-
balance real estate. Private asset markets possess unique opportunities to generate
substantially greater risk-adjusted performance than what can be achieved through their
public counterparts. Quantitative strategies eliminate humans’ cognitive bias and allow
traders to clearly identify and navigate trends to capitalize on market inefficiencies.
Applying both quantitative strategies and derivatives such as options, forwards, and swaps
to private markets can dramatically improve risk-adjusted performance as we’ve done
since 2007:
Step 2: Source Superior Risk-Adjusted Performance (continued)

Institutional-Grade Private Funds

Private investment funds (Reg D) are a dime a dozen and have a pretty bad reputation in
general. Many are poorly managed and don’t execute their exit strategy. That being said,
the opportunity to generate substantial risk-adjusted performance can only be found
through private funds. So how do you identify the rare quality private funds that you
should invest in? First, you need to know what to look for. They should have institutional-
grade characteristics:

‣ Strong Risk-Adjusted Performance (as measured since January 2007, or earlier)

‣ Quarterly Reporting

‣ Third-Party Administration

‣ Annual Audits

‣ High Investment Minimums (must be a qualified purchaser as defined by the SEC)

Step 3: Access Superior Risk-Adjusted Performance

Investment Clubs
Investment clubs (as recognized by the SEC) can be organized by anyone (no licensing
required) and facilitate access to top performing private funds for both accredited and
non-accredited investors. The SEC, in its publication Investment Clubs and the SEC
(January 13, 2016), has specifically verified that membership in investment clubs is not a
security interest insofar as all members are active (by vote) in the decisions of the club.
There are a few misconceptions about investment clubs that I should get out of the way: 1)
investment clubs cannot advertise for new membership, 2) investment clubs cannot hold
over $25MM in assets, and 3) investment clubs cannot have over 100 members. These
false beliefs generally come from a casual reading of  Investment Clubs and the SEC  and
may only be true if the investment club's membership interests are structured as securities,
which effectively turns the club into a fund and makes it subject to the '40 Act. That being
said, it is important to note there are some state level regulations that you must make
yourself aware of to compliantly form an investment club in your area. Following the basic
guidelines provided by the SEC prevents your investment club from operating as a private
fund and removes these constraints.
Step 3: Access Superior Risk-Adjusted Performance (continued)

Investment Clubs with Access to Superior Risk-Adjusted Performance

Under the Securities Act of 1933, CFR §230 Reg. D Rule 501(a)(3), any business with total
assets in excess of $5MM not formed for the purpose of acquiring a specific security is
defined to be an accredited investor. In other words, investment clubs themselves become
accredited investors when they aggregate $5 million; and when they hit $25 million of
investable assets, they become qualified purchasers. As long as no more than 40% of the
club’s assets are allocated to one particular fund, it is clear of being deemed as formed for
the purpose of investing in any one fund. What does this mean? Remember that
institutional-grade funds generally require a minimum investment of $1 million or more,
and you generally have to meet the definition of qualified purchaser to be eligible to
invest. Investment clubs solve that problem. Many individuals who share the same risk-
adjusted performance standards can pool their capital together within an investment club.
From the fund’s perspective, the investment club is one investor, and as long as it meets
the qualified purchaser standard, it is eligible to invest. Adagio Institute is a 501(c)3 public
charity helps individuals join investment clubs formed around superior risk-adjusted
performance thresholds and source otherwise impossible-to-access institutional-grade
funds.
Step 4: Organize Fellow Smart Investors

Organizing an Investment Club

You can profit by utilizing investment clubs to compliantly aggregate other retail investors
to invest in quality private funds and afford yourself access to these funds in the process.
One of the biggest advantages of utilizing the investment club structure deals with
advertising. Because club membership, when properly structured and administered, is not
considered a security, there is no federal prohibition on general solicitation or advertising
for membership. That allows for innovative marketing strategies to communicate the
unique benefits of membership and aggregate investable assets—strategies that we’ve
studied extensively, continue to utilize, and have proven highly effective. In the Investment
Advisers Act of 1940, §202(a)(11), teachers are specifically excluded from the definition of
investment adviser. This exclusion allows for general financial advice to be provided by
unlicensed individuals insofar as it is incidental to an educational program. So educational
programs can be utilized to both market club membership and provide ongoing value to
members in support of their shared interest to recognize appropriate, quality financial
products, which ultimately guides the club’s investment decisions. Can you see the
advantages of being able to pool unlimited money into accredited and qualified entities
without being subject to the legal burden of managing a fund or securities brokerage?
Adagio Institute helps both individuals and firms (such as CPAs, independent insurance
agents, IRA custodians, real estate agents, marketers, etc.) form investment clubs,
compliantly structure their compensation, develop educational materials for club
members, measure risk-adjusted performance of prospective club investments, and recruit
membership.
The Shadow Banker’s Secrets

Ben Summers Wrote the Book on Investment Banking for Alternatives

Ben Summers wrote The Shadow Banker’s Secrets: Investment Banking for Alternatives to
help level the playing field between the big banking interests and the public by sharing his
extensive knowledge of quantitative analysis, risk engineering, capital formation,
compliance, and investment clubs. The Shadow Banker’s Secrets brings you the very same
expertise he employs everyday on behalf of Adagio’s clients. It will provide you all the
information you need to both beat the markets and protect yourself from market crises
with techniques you simply can’t learn anywhere else. Further, it will even show you how to
start and quickly scale your own asset management business to nine figures and beyond
by creating highly valuable capital out of thin air as your own shadow bank. You’re going to
discover how to use the most esoteric skills of the banking industry to beat the system at
its own game. We've tailored the information to meet the needs of every market
participant: from the most sophisticated financial professionals to those who've never even
thought about the subject. It's structured so that no matter what your background is, all
you need is a willingness to learn, and by the end, you’ll know everything you need to
establish absolute financial independence.

To learn more, visit: www.adagioinstitute.org/shadow-bankers-secrets-book

Author Biography

Benjamin D. Summers
Ben is the founder and managing director of Adagio Group. Through the application of his
extensive knowledge in quantitative finance, the application of risk engineering principles,
and private securities transactions, Ben has led Adagio from a single entity real estate
investment company in 2005 to become an innovative financial institution.  He also has
substantial senior management experience within the global energy services sector. Ben’s
transition into energy and finance was preceded by a professional baseball career that
began with the San Diego Padres organization. He graduated from Louisiana State
University with a Bachelor of Science in Physics having studied Music as a Second
Discipline. Ben currently holds the FINRA Series 65 and Florida Real Estate Licenses.

To learn about Ben’s path from investor to investment banker and how to form your own
shadow bank, visit: www.adagioinstitute.org/shadow-bankers-secrets-book