Morgan Group LLC

1
Morgan Group LLC

• Market Neutral and
• Absolute Return Investment Fund
• 4 Years of Development
• Consistent returns,
• Uncorrelated to the SP,
• Low relative risk
• April 2006
• Les Gray
• 401-254-1777
• lesgray_at_morganllc.com

2
Morgan Group

• We are a family office, managing a diverse
  portfolio of (mostly) alternative investments
• In 2002, we set out to develop an investment
  process for US equities that would produce
  superior returns in any market.
• Our backgrounds are in Banking and in Technology
  (signal processing and engineering)
• We are ex Entrepreneurs and CEOs.

3
Investment Opportunity

• Market Neutral Strategy
• Goals Reasonable return at low risk
• Annual Return gt20 per year in all market
  conditions
• Risk (Standard Deviation) lt10
• Target Sharpe Ratio gt2.0
• Absolute Return Strategy
• Goals Superior return at acceptable risk
• Annual Return gt 40 per year in all market
  conditions
• Risk (Standard Deviation) lt15
• Target Sharpe Ratio gt3.0

4
Some Background

• We started a Pilot Fund in 2002 to develop
  investment models, with the objectives
• Scalable Can take a lot of
• Robust Simple to use
• Transferable No gut involved
• Competitive Deliver consistent absolute return
  (target gt20 per year)
• Marketable Meet the demands of the current
  market
• This development effort is largely complete.
• Our Market Neutral and Absolute Return strategies
  for US equities meet these goals

5
We have developed 2 Investment Models

• Market Belief Model
• This Model selects baskets of stocks that
  reflect sets of beliefs about the market that
  are held by certain buyers.
• Selected stocks should outperform in the near
  future
• 4 years experience. Performance gt2 per month
  above SP,
• Can trade as either Long-only, or Long/Short
• Market Sentiment Model
• Predicts the short term market direction ( 1
  week).
• Trades with Market Futures or ETFs
• Performance gt1.5 per month, uncorrelated,
  Long/Short, directional on a weekly basis
• We use this model to add some market bias to
  the Market Belief model - resulting in the
  Absolute Return investment strategy

6
Market Belief Model

• Identify beliefs held by various buyers - e.g.
  value, growth, momentum.(16 total)
• Separate quantitative measures associated with
  each belief
• Correlation Analysis isolate the important
  quantitative metrics
• Perturbation Analysis - test relative impact of
  metrics
• Define screen
• Test screen for competitiveness
• Release to production

7
Market Sentiment Model

• Collect sources of data that might predict
  market direction - get them all
• Structure a voting algorithm let them vote on
  market direction
• Weight the vote by how well they are doing
  recently
• Test for the coefficients of the voting algorithm
• Release to production.

8
Our Investment Products

• Our 2 models may be used alone or in combination,
  to produce different investment products
• These may have different customers, risk, return,
  taxes and capacity
• They use different market bias (none, variable or
  total)
• They u different leverage (none or some)
• Our Products
• Market Neutral (dollar-neutral, no leverage or
  directional bias)
• Absolute Return (uses leverage and market
  directional bias)
• Long-Only (for accounts that accept underlying
  market risk)

9
Market Neutral US Equities

• Our Market Belief model employs a set of
  Screens that reflect normal buying decisions
• Typically 10 - 15 screens active at any time,
  each buying 20-40 positions.
• Hundreds of positions held at any point US
  equities
• Turnover 4 weeks (all Short term capital gains)
  
• Average return gt2 per month over SP,
• Our Market Neutral strategy simply holds the SPX
  as the short side
• Current process is objective and back-testable.
  
• No operator decisions
• Trading and execution issues have been resolved

10
Market Neutral US Equities

• Changes during 4-yr development period
• Resolved scalability, transferability, and
  robustness issues
• Standardized screens to avoid random
  correlations
• Use market as short side to solve hard to
  borrow and other shorting issues
• Shortened holding period, and solved transaction
  cost issues
• Actual and Pro-Forma results
• Actual results reflect returns as achieved with
  the model over time in its then current form (the
  model has changed as outlined above)
• Pro-Forma results reflect our current model back
  tested over this same period

11
Pro-forma Results for Model

• Pro-forma results for current released strategy,
  backtest over 4-years 2002-2005 (Includes fees
  and est. transaction costs).
• Pilot Fund is unaudited, has periods with
  market bias, reflects only the portion of the
  fund devoted to this strategy, reflects expected
  fees, and includes model changes during period.
  However, basic procedure and philosophy hasnt
  changed.

12
Market Neutral Strategy
13
Absolute Return Strategy

• Our Absolute Return strategy - exceptional
  returns in all market conditions
• Combines results of Market Belief and Market
  Sentiment Models
• Allows use of leverage (up to 1.8x) on core
  Market neutral investment
• Allows directional bias (up to 0.6x) on a weekly
  basis, as directed by our Market Sentiment
  model reduces or increases short side
  coverage in some market periods.
• Proforma back-test based on period Oct 04-Jan 05.
• Annual return gtgt50
• Standard Deviation 18
• Correlation to SP .60
• Sharpe Ratio 4.5

14
Product Pos. and Neg.

• Market Neutral
• Positive Good solid returns at low risk.
  Simplicity. Sharpe Ratio gt2.0. Attractive to
  conventional Fund managers.
• Negative Taxes (all Short-Term Gains)
• Absolute Return
• Positive Exceptional Return/risk profile.
  Sharpe Ratio gt3.0.
• Negative short development period, complexity,
  volatility, taxes, some operator skill
• Capacity Constraints
• We estimate that capacity constraints may start
  to impact returns for both strategies at roughly
  the 500M level.

15
Customers and Partners

• We are open to managed accounts
• We currently manage for other Funds,
  Corporations, and HNW individuals
• Our Long term target 10 or so really good
  customers or partners
• We are in the process of launching our Funds
• For those customers who want an existing fund
  structure, we will have the Market Neutral and
  Absolute Return Funds available for investment in
  Q2, 2006

16
Managed Accounts

• Benefits
• Completely Transparent to Customer
• Simple management agreement
• Controls Customer risk
• Requirements
• UNX (www.unx.com) must be Prime Broker (their
  basket and execution software are necessary)
• Goldman Sachs is the clearing Broker, but the
  account may DVP to another clearing broker, if
  desired
• 10.0 MM minimum investment