The Enhanced Long-Short S&P 500 Index Strategy (the “Strategy”) is an actively managed strategy that is designed to identify and profit from the major trends in the S&P 500 index. The objective of the Strategy is to deliver 70% of the absolute value of intermediate-term S&P 500 movements, to outperform the S&P 500 by 10-12% per year net on a long-term basis, and to deliver positive returns during both bull and bear market cycles.
The Strategy is suitable for U.S. equity investors seeking to capture S&P 500 Index returns in up markets but to be protected during down markets. The hypothetical results of JFM’s 8-year evaluation of the Strategy suggest that it has the potential to deliver risk-adjusted returns that are superior to the S&P 500 Index with a lower standard deviation (13% hypothetical standard deviation for the Strategy versus 19.8% for the S&P 500 Index) and a higher Sharpe Ratio (1.35 hypothetical Sharpe Ratio for the Strategy versus -0.29 for the S&P 500 Index).
The Strategy was developed by JFM and is based on two elements. The first element is a long-short strategy that is based on a set of proprietary trading rules for the S&P 500 Index. The long-short element of the Strategy is identical to the Long-Short S&P 500 Index Strategy, and will typically be 100% invested in either long or short positions, although it may periodically be invested in cash or cash equivalents during periods of market turbulence or pending reversals. The long-short element of the Strategy will be primarily implemented using unleveraged long and short exchange traded funds (ETFs). The long component will be primarily implemented with SPY, an exchange traded fund sponsored by State Street Global Advisors that is designed to replicate the total return for the S&P 500 Index. The short component will be implemented by either selling SPY short or with SH, an exchange traded fund sponsored by ProShares Advisors, LLC that is designed to correspond to the inverse of the daily performance of the S&P 500 Index. The Strategy may periodically employ leveraged long and short ETFs, such as SDS and SSO, both of which are sponsored by ProShares Advisors, LLC.
The second element of the Strategy is a market neutral S&P 500 Index volatility arbitrage strategy. Approximately 80% of the portfolio’s margin account will be used to fund the option requirements to implement this strategy. The volatility arbitrage strategy is identical to the strategy used for JCM Investment Fund LP and will be implemented with short-term S&P 500 index option contracts that are typically 5-8 weeks from expiration. The volatility arbitrage strategy sells far out-of-the-money option contracts (i.e. shorting volatility) to capture “theta bleed” or time decay of option premiums. The volatility arbitrage strategy typically enters into delta-neutral positions to achieve low option premium changes compared to the value of the S&P 500 Index. Risk is managed for the volatility arbitrage strategy through active re-balancing of positions, hedges for short put positions, and other proprietary risk management strategies.