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August 2011 Investor Letter

Queens MBA Investment Club


Prepared by David Yao
Continuous Learning & Excellence David Yao | Colin Moore | Peter Szaflarski | Paul Rajasekaran | Troy Hart | David Tron ______________________________________________________________________________________________________________________________________________________

September 3, 2011

Monthly Review
For the period between Aug 1 Sept 2, 2011, the Queens MBA Investment Clubs fund has returned 2.60%, beating the S&P 500 on the month by 11.76%. This has been a tremendously volatile month for the markets, which opened with the ominous threat of a US government default. The disappointing debt deal and subsequent S&P downgrade, in combination with an ever deteriorating situation in Europe, forced us to take a bitter haircut and wind down our long positions. Subsequently, we began to aggressively position the book to be net short. Leading up to and following Bernankes promise of near-zero interest rates until 2013, the markets swung up and down in a volatile schizophrenic fashion. Given this breath-taking volatility, we had to cut a great deal of our exposure mid-month, in preparation for a week off during which no one would be available to monitor the book. With a modestly long gold position going into monthend, the book was hit quite hard when large exchange margin hikes triggered a price collapse in the precious metal. We enter September with long exposure to gold and are slightly net short of US equities, notably financials.

QMBA IC Fund S&P 500 TSX Since Inception Aug-11 2.60% -9.16% -2.65% 3.17%
Sharpe Ratio QMBA IC Fund S&P 500 TSX Aug-11 0.84 -2.28 -0.93

Annualized 19.02%

(Source: Interactive Brokers Portfolio Analytics) * Risk free rate used to calculate Sharpe Ratio = 4.00%

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August 2011 Investor Letter

Queens MBA Investment Club


Prepared by David Yao
Continuous Learning & Excellence David Yao | Colin Moore | Peter Szaflarski | Paul Rajasekaran | Troy Hart | David Tron ______________________________________________________________________________________________________________________________________________________

Notable Trades
Long Gold Gold is often vaunted as a safeharbour asset to hold in times of uncertainty, but the extreme volatility of the past month forced us to question the validity of this belief. It is quite disconcerting to see a safe-harbour asset fluctuate by $50 each trading session. However, this precious metal was no longer viewed as only a commodity, but as an alternative currency. With depressed interest rates in the US, the ever deepening debt crises gripping the EU, and irrational talks of currency pegging by the SNB, there really is only one direction for gold to go. We scaled into gold around the 1,750 level during the first week via the purchase of call spreads on the GLD. This capped our maximum profits, but the vols were far too high to purchase long exposure outright. The continued rally upwards following the lacklustre price reaction from the first CME margin hike re-affirmed our belief that the underlying factors driving the buying were still well in place. There was a feeling that the long gold trade may have become crowded, but the price had already shot up beyond the short leg of our call spreads. With a bit of buffer in place, we sold off a few put spreads to capture some of this extreme volatility just before the week off. On arriving back, both the Shanghai Gold Exchange and CME substantially hiked margins for gold. We knew there would be some downward pressure on price levels, but not enough for us to prematurely exit our long positions. Then came a breath-taking $100+ drop straight down, which ejected many of the speculators who had jumped on board during the last leg of the run up. Although confident that prices would recover, we would not be sucked into the cardinal sin of trading by averaging down. Because price levels could collapse further to 1,600 and we would still be in a well-defined bull trend, we put our stops in place and watched the price action with uneasy trepidation. Gold struggled, but relentlessly clawed its way back upwards, and this price resilience necessitates that we get longer of the precious metal. We will be rolling over our long exposure in September and will definitely be looking to get longer, especially in light of the flat August jobs report.

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August 2011 Investor Letter

Queens MBA Investment Club


Prepared by David Yao
Continuous Learning & Excellence David Yao | Colin Moore | Peter Szaflarski | Paul Rajasekaran | Troy Hart | David Tron ______________________________________________________________________________________________________________________________________________________

Short US Equities We began the month holding onto a small short position against the S&P 500, hedging our long exposure to US equities given the uncertainty of the US debt deal. When the terms of the deal were finally announced, the Street was quite disappointed and the market sold off heavily in a jaw-dropping plunge downwards. My first internship on a trading floor was during the collapse of 2008, and with that gut-wrenching experience fresh on my mind, we scrambled to unwind our long positions. We quickly positioned the book to be net short, against the S&P, NASDAQ, and US financials. The markets sold off extremely hard immediately following Bernankes announcement of no new quantitative easing, but rallied violently into the close on the back of his promise of near zero interest rates. However, he cut growth forecasts and in essence implied that the US would likely slip into another recession, not exactly news supportive of prices. In hindsight, Aug 8 seems to have marked the lows, but US equities swung up and down in violent fashion during subsequent sessions as the market struggled to find direction. Although we felt there would be further downward pressure on the markets, we substantially cut our short exposure leading up to the week off in mid-Aug, in light of all the volatility. The latter part of the month saw a run upwards in US equities, but we did not feel this buying pressure would be sustainable and thus did not add any long exposure. We end the month holding mostly cash with a small short position in US equities.

Market Outlook
In light of the absolutely horrendous jobs report, which showed no new jobs creation in August, there is heightened speculation that the Fed will launch a new round of quantitative easing, with many on the Street now anticipating that Bernanke will intervene to lower long-term interest rates. Although QE2 was able to push up the S&P 500 higher by around 30%, how much price support a further round of QE will have on equities is questionable. With the debt situation in Europe adding further downward pressure, we expect the equity markets to trade sideways or downwards in continuing high volatility until more clarity is given at the Feds Sept 20 meeting. Given all the global-macro uncertainty, we expect gold prices to push upwards making a run at $2,000. It is definitely worthy to note the potential over-bought nature of gold, accentuated by the fact that the GLD gold trust had exceeded the SPY ETF in value. However, the underlying factors that 3|Page

August 2011 Investor Letter

Queens MBA Investment Club


Prepared by David Yao
Continuous Learning & Excellence David Yao | Colin Moore | Peter Szaflarski | Paul Rajasekaran | Troy Hart | David Tron ______________________________________________________________________________________________________________________________________________________

drove investors to gold are still in place and the price levels have proven extremely resilient in its recovery. Although stopped out of our shorts against the EUR at close to the top of the market earlier in Aug, we will be keeping an eye on the monetary union and will step in as sellers of the EUR once again if the situation there shows signs of further deterioration or any policy announcements of monetary easing.

Club Goals
In the coming month, members will be focused heavily on On-Campus Recruitment initiatives. One of the key Club goals for September will thus be to support one another through the OCR process and to add value to interview preparations.

Sincerely yours, Queens MBA Investment Club

Performance results are based on the net asset value of the Queens MBA Investment Clubs investment fund converted to the base currency (CAD) and are presented net of brokerage commissions, accrued performance allocation, if any, and include the reinvestment of all dividends, interest, and capital gains. The performance above represents fund-level returns, and is not an estimate of any specific member investor's actual performance, which may be materially different from such performance depending on numerous factors. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the express written consent of an executive of the Queens MBA Investment Club. Website: http://www.queensmbastudents.com/queens-mba-investment-club Enquiries: David Yao President david.yao@queensu.ca (613) 893-1051 Peter Szaflarski VP Stakeholder Relations p.szaflarski@queensu.ca (647) 829-9462

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