Sapiance employs a systematic short-term approach that relies on sophisticated quantitative models that most

closely approximate volatility-breakout and mean-reversion strategies.

Employs a multifractal random walk model (MRW model) it believes capture the fat tails and self-similarities in
financial time series better than other models.
The strategy is traded across a diversified portfolio of more than 40 exchange-traded futures contracts.

Trading Methodology

The Texys program employs a highly quantitative multi-model approach to short-term trading that it applies across a
diversified portfolio of foreign exchange and exchange-traded futures markets. Sapiance simplifies the description of its
two models by approximating the sort of phenomena they exploit.

The first of these is a volatility-breakout model, but in reality it is a multifractal random walk (MRW) model, a type of
stochastic volatility model that Sapiance believes prices both the center and the tails of the distribution well. The MRW
calculates thresholds at which the program will take a long or short position based on a predetermined position size and
time interval. If the market reaches these levels, assumed to be a move with an expected probability of less than 5%, the
program will enter a position which is relatively expensive if going long or cheap if going short, in local terms. The raw
output of the model consists of a return forecast from the previous close which allows Sapiance to determine stop-loss
limits and entry levels. The parallels to a volatility breakout strategy are obvious, but the MRW model should provide
superior returns forecasts relative to nave volatility breakout strategies. Traditionally, volatility breakout strategies
include volatility thresholds through which markets must pass before taking positions. The MRW model Sapiance
employs does something similar, but it accounts for non-Gaussian and conditional volatility, whereas traditional rules-
based volatility breakout does not. The MRW model is also timescale invariant, allowing Sapiance to fix position size in
terms of value-at-risk.

Sapiance calls the second component of the Texys program its mean-reversion model, which uses the MRW model to
forecast volatilities along with a second model which measures a trend component in the time series. This model is
applied only to equity index futures, which research determined to be the only market sector which displays this
phenomenon. The models provide probability estimates which vary according to the distance of prices from the trend
line. The MRW model helps to transform the time series to reduce noise and therefore a common source of risk present
in traditional mean-reverting strategies. As such, the transformed trend line is, in a way, more representative of the
mean around prices oscillate. The model adjusts its position at each settlement and trades at an uncertain price or
quantity relative to the mean, or trend line, as a function of estimated probabilities. Again, the model Sapiance
employs is not precisely a traditional mean-reversion strategy, but rather a more sophisticated variation of one.

The volatility breakout model therefore trades at uncertain times but at fixed prices where the breakout takes place
whereas the mean-reversion model trades uncertain quantities at uncertain prices at a specified time depending on
how far the price has deviated from the mean. The only time the mean-reversion model will not have a position in a
given market is if it stops out as a function of time.

Portfolio construction is sum of the signals generated which are then calibrated according the programs target portfolio
volatility before being subjected to a constrained Markowitz optimization. The weaknesses of Markowitz optimization,
namely its Gaussian assumptions and tendency to be backward-looking in nature, are mitigated to an extent by the
assumptions implicit in the underlying models. The signals generated by the MRW model and therefore the elements of
the portfolio have volatility and correlation forecasts embedded in their output, as well as some of the higher moments
of the distribution. This allows the portfolio to become conditionally Gaussian, suggesting that Markowitz assumptions
are suitable. The signals are also generated using predictive techniques, as opposed to completely reactive or backward-
looking applications. Sapiance uses a covariance matrix looking back over a seven year period, rolling on a quarterly-
basis. The manager believes that this allows the portfolio construction to incorporate some historical information,
despite the fact that this information may not necessarily be relevant to prevailing market conditions.

Risk Management

Sapiance Capital relies heavily on the volatility and correlation forecasts inherent in its trading models which determine
position size and/or the distance of the stop-loss limit (if applicable). The manager tightly controls margin usage and
measures risk in terms of exposure as a percentage of notional assets.

Sapiance takes a pragmatic approach to the implementation of stop-loss limits and views itself as stop-loss neutral
insomuch as it will only implement these for models with which their use is consistent. The volatility breakout model
employs stop-loss limits since Sapiance views each signal as an independent statistical bet with a fixed level of risk. The
manager believes that its volatility breakout model has a statistical edge so it looks at each trading opportunity
independently and will fix the risk in terms of stop distance to prevent catastrophic losses while preserving the inherent
positive skewness of the strategy. The mean-reversion model takes a continuous time approach to trading and risk
and utilizes a time stop since the success of this model depends more on time than any other factor.

The portfolio construction methodology uses a constrained mean-variance optimization approach which helps to hard
code diversification among the portfolios various positions.

Sapiance has developed a number of portfolio and risk monitoring tools which help it monitor positions, profit and loss,
slippage, and deviations of actual performance from hypothetical. The manager may discretionarily intervene against
the program to reduce risk in the event of a systematic shock or other exogenous event that would render the
assumptions upon which the models were built irrelevant. This would be reserved for only the most extreme
circumstances.

Edge

Sapiance Capital employs a state of the art stochastic volatility model which it believes describes financial markets more
completely and parsimoniously than any other model to date. Professors Emmanuel Bacry and Jean-Franois Muzy have
written numerous articles on this model and related topics, and have backgrounds and research credentials that suggest
they are well qualified to develop and test systematic trading strategies. They have also extended and contributed to the
literature on time series models and forecasting in the course of research on models similar to the ones employed by the
program. The trading experience of the other three partners compliments the research backgrounds of the two
professors not only because of the valuable insights they contribute with respect to trade implementation and practical
application of the research, but also in terms of research idea generation. Fabrice Berrebi, Edmond Turquieh, and
Gonzague Huynh have been trading and observing the markets for nearly twenty years each on the trading desks of
investment banks, providing them with unique insights into the nuances of markets and the behavior of participants
which offers a fertile breeding ground for ideas for trading strategies.

The cohesion and mutual trust among the various members of Sapiance due to the duration of their professional and
personal relationships with one another appears to provide another source of strength for the trading manager.

Manager Biographies

Edmond Turquieh Chief Investment Officer

Edmond Turquieh has eight years of securities industry experience in Tokyo, specializing in equity derivatives, market
making, and proprietary arbitrage trading for Paribas/BNP Paribas. He has been a key contributor in all areas of the
firms business development, from building trading/risk management systems and infrastructure, to generating and
researching new trading opportunities. He graduated from Ecole Superieure de Commerce de Paris (now ESCP-EAP
group) in 1994 and Paris Dauphine University, majoring in finance.

Fabrice Berrebi Chief Executive Officer

Fabrice Berrebi has worked as an OTC structured products derivatives trader in Tokyo, Japan for Credit Lyonnais
securities from 1994 to 1996 before heading to CL Securities UK equity derivative trading team. He was recruited by
HSBC in 1998 and appointed as Head of Global Index Trading. Fabrice has a strong network of connections in the
alternative investment industry. He graduated from Hautes Etudes Commerciales (HEC) in 1993, majoring in finance.

Gonzague Huynh Trading/Research

Gonzague Huynh worked in Tokyo in the Equity Derivatives industry for Credit Lyonnais, First National Bank of Chicago,
and Banque Paribas where he managed the structured products and exotic derivatives portfolio. He joined Sapiance
Capital Ltd in June 2005 where he focused his attention on shorter term trading strategies. Gonzague graduated in 1991
from ENSAE (National School of Statistics and Economic Administration).

Emmanuel Bacry & Jean-Franois Muzy

Emmanuel Bacry & Jean-Franois Muzy, are academic researchers at the CNRS (Centre National de la Recherche
Scientifique). They are also University professors and teach at Ecole Polytechnique, the most prestigious French
engineering school. They have done research on time series analysis, including such diverse fields as music, biology,
geology, finance, and using broad arrays of tools, from chaos theory to wavelets to econometrics. They have acted as
consultants on a regular basis in several financial institutions such as Deutsche Bank, CFM, Socit Gnrale. Emmanuel
is an applied mathematics graduate from Ecole Normale Superieure Ulm, and Jean-Franois holds a PhD in Physics.