1. Industry Specific Hedging Golden Toque Capital Carrington Bradley Patrick Kane Pete Rudnick Dennis Wu February 26, 2004

2. Agenda  Introduction  Industry and Factor Selection  Screen Results  Portfolio Performance  Out of Sample Testing  Optimization  Parting Thoughts

3. Introduction  Industry Specific Comparison  Are there certain industries that over/under perform based vs. the market?  Cam’s Merrill Lynch work  Starting point for variables  Interest in using FactSet  Cool and powerful tool  Get to use a $250,000 laptop

4. Industry Selection  Based on SIC Codes  Two digit codes in FactSet  Minimum of 100 companies listed  Banking, Energy, Food, Electronics, and Telecom  Compare to US Common Stock returns for same time periods  1990 to 2000 in-sample time period

5. Factor Selection  Based on Quant Stock Selection Class  Expectational  Consensus forecast earnings estimate revision ratio  Change in consensus FY estimates  Momentum  1 month Price change  3 month Price change  Fundamental  Dividend Yield  Rate of Reinvestment

6. Energy Screen Results

8. Banking Screen Results

10. Banking Bivariate Result

11. Out of Sample Results Energy Sector 2001-2002 1 month momentum Reinvestment

12. Banking Sector 2001-2002 Out of Sample Results 1 month momentum 3 month momentum

13. Factor Optimization  Energy Sector with optimized weights  Double S&P Risk  27.3% Return

14. Factor Optimization  Banking Sector with optimized weights  33% more risk than S&P  31.2% Return

15. Parting Thoughts  None of our 8 screening factors were effective screens for total US stocks  Screening by return and going long yields average monthly return: Energy -0.26, Banking 0.16  Solver optimized weights had correct sign  Made lots of money, but did not consider trading costs

16. Additional Slides

17. Factors  Code 1: 1 month price change  G_PRICE_1MCHG  Code 2: 3 month price change  G_PRICE_3MCHG  Code 3: Div yield  G_DIV_YLD(NR 0 L45D)  Code 4: Rate of reinvestment  G_REINV_RATE(NR 0 L45D)  Code 5: Consensus forecast earnings est. revision ratio  (IH_UP_FY1R(0)- IH_DOWN_FY1R(0))/IC_NEST_FY1R(0)  Code 6: Change in consensus FY estimates  IH_MEAN_FY1R_3MCHG  Code 7: Operating Cash Flow/Sales  G_CASH_FLOW/G_SALES  Code 8: Interest Coverage  G_INT_COV

18. SIC 13 Summary Energy

19. SIC 60 Summary Banks