Date: 29 th July, 2018 PURPLE TREE INVESTMENT MANAGEMENT INDEX OPTIONS PROGRAM INVESTOR PRESENTATION
PURPLE TREE INVESTMENT MANAGEMENT Who we are: • Purple Tree is a boutique Investment Manager based out of Mumbai. • Investments are managed by founder Jigar Shah, CTP(USA), MBA(Finance), B.E. Computers (click here to see his LinkedIn profile) • Purple Tree’s business is grounded in the belief that the scientific method can be profitably applied to the field of investing. Purple Tree uses a multi-strategy, systematic approach that invests long and short in Index Options only.
PURPLE TREE INVESTMENT MANAGEMENT Four Important Investment Objectives of Purple Tree: 1. Higher returns irrespective of market direction 2. Stable & Consistent returns 3. Regular income – cashflows 4. Minimize drawdowns
PURPLE TREE INVESTMENT MANAGEMENT Limited Investment Options for Investors: Currently, there are only 2 equity investment vehicles available in the market – 1. Mutual Funds 2. Traditional PMS schemes Both these vehicles invest majority of the corpus in cash equities only. Purple Tree recognises and solves the inflexible and limited Investment Options problem through our flagship ‘Index Options Program’
PURPLE TREE INVESTMENT MANAGEMENT Drawbacks of investing in Mutual Funds and traditional PMS schemes: 1. Lower risk adjusted returns 2. Returns are market dependent and inconsistent as they are Long Only funds. 3. Absence of Advanced Investment Strategy & Technology 4. Higher Costs
PURPLE TREE INVESTMENT MANAGEMENT Overcoming the drawbacks of Mutual Fund investments: 1. Risk adjusted Returns CUMULATIVE GROWTH OF RUPEES 10 LACS INVESTED Purple Tree Top Large Cap MFs Nifty 50 Period Purple Tree Top Lcap MFs Nifty 50 1 month % +7.9% +2.9% +5.3% 65.7 70.0 3 months % +14.64% +2.35% +5.01% 1 year* p.a. +41.5% +11.8% +10.25% 60.0 2 years* p.a. +47.6% +16.7% +14.5% 46.4 50.0 Inception* p.a. +36.9% +16.2% +11% RS IN LACS 40.0 30.2 Parameters Purple Tree Top Lcap MFs Nifty 50 30.0 24.1 Annual Volatility 9.25% 13% 11.5% 18.8 Annualized returns 36.9% 16.2% 11% 20.0 13.8 Sharpe Ratio 3.12 0.63 0.32 Correlation 1.00 0.13 0.36 10.0 • Large Cap Mutual Funds have given 16.2% pa returns in last 6 0.0 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 years as compared to 36.9% pa returns given by Purple Tree with 30% lesser risk as evident from the volatility of returns. • Purple Tree has yielded 5 times higher risk-adjusted returns as * Returns are based as on respective FY end. compared to Large Cap Mutual Funds as evident from the Top Lcap MF – Top Large Cap Mutual Fund Avg includes Sharpe ratio. 1) ABSL Frontline Equity (G), 2) Franklin India Bluehip (G), 3) Axis Bluechip fund (G), 4)Kotak Bluechip Fund(G), 5)Tata Large Cap fund (G), 6) Indiabulls Bluechip fund (G) and 7) DHFL Pramerica Large Cap Fund(G).
PURPLE TREE INVESTMENT MANAGEMENT Overcoming the drawbacks of Mutual Fund investments: PERFORMANCE COMPARISON Nifty Top Lcap MFs Purple Tree 53.7% 2. Correlation of returns with market and consistency 41.5% 38.1% 39.4% • 36.2% Returns from Mutual Funds are highly correlated with the market returns (>0.95) whereas Purple Tree’s returns have much lower 28.2% 25.3% 26.3% correlation with the markets (0.36). This is due to the fact that 22.1% Mutual Funds are long only instruments & do not short in falling 19.8% 18.9% 17.5% markets. 12.0% 11.8% 10.3% 6.9% • As evident in the graph, in 2015-16, when Nifty corrected for majority of the year even Mutual Funds corrected, similarly in 2017-18, last quarter, Nifty corrected heavily leading to erosion of 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 majority of the gains made by the Mutual Funds in 2017. -3.6% -9.9% • Purple Tree gave positive returns in excess of 25% in 2015-16 even when markets were down and similarly outperformed in 2017-18. Period Purple Tree Top Lcap MFs Nifty 50 1 month % +7.9% +2.9% +5.3% • We can also observe similar trend in the last 3 months, where 3 months % +14.64% +2.35% +5.01% Mutual funds gave 2.4% returns as against Purple Tree’s returns 1 year* p.a. +41.5% +11.8% +10.25% of 14.6%. 2 years* p.a. +47.6% +16.7% +14.5% Inception* p.a. +36.9% +16.2% +11%
PURPLE TREE INVESTMENT MANAGEMENT Overcoming the drawbacks of Mutual Fund investments: 3. Advanced Investment Strategy & Technology • Mutual Funds use plain Fundamental Analysis to arrive at their investment ideas. • Purple Tree uses latest investment technologies like Machine Learning Algorithms incorporating more than 140 Factors (Financial & Quantitative) along with Visualization tools and Statistics for its decision making.
PURPLE TREE INVESTMENT MANAGEMENT Overcoming the drawbacks of Mutual Fund investments: Cost-Benefit Analysis 4. Costs 30 PMS 25 Mutual Fund 20 Fees Purple Tree 15 10 5 0 0 5 10 15 20 25 30 35 40 45 Returns Purple Tree Top Large Cap Mutual Funds/Traditional PMS • Purple Tree charges zero management fees and zero exit • Charge anywhere between 2% - 3% of corpus every year load. Further, for benefit of investors, performance fees regardless of profit or loss or % returns. is subject to high watermark levels. • It comes to around 20% of profits generated on an • Performance Fee structure (Quarterly) average basis since last 6 years {[(2.5% expense ratio) + (1% exit load)] /16.2% in last 6 years} which is expensive Returns per quarter Performance Fees for such mediocre risk adjusted returns. <=2.50% 0% >2.50 & <5.0% 10% >=5.0% 20%
PURPLE TREE INVESTMENT MANAGEMENT Market Strategy Overview: Research Process at Purple Tree Build High Market Prediction & Feature Engineering Risk & Trade Accuracy Machine designing Option Using Statistics and Management Learning Models Strategies Mathematics . Feature Engineering: More than 140 features are extracted from the raw financial dataset using different statistical tests, where p-value is lesser than 0.2 for most of the features. While creating the features, it is kept in mind what is the outcome desired from the predictive model and accordingly features are created and selected. Feature Engineering alone takes up more than 2500 lines of code. Machine Learning Models: Post feature engineering, machine learning models are selected based on the type of prediction and dataset. At Purple Tree, 7+ Supervised Classification Machine Learning Models are predominantly used for the type of prediction carried out by us. The machine learning models are trained on large historical financial dataset along with all its features to identify patterns.
PURPLE TREE INVESTMENT MANAGEMENT Market Strategy Overview: The Nifty 50 graph shown consists of Long and Short signals denoted by ‘Blue’ and ‘Red’ spikes respectively. The p-value is 0.11 for this proprietary signal since 2003 resulting in accuracy score of 89% and is used as one of the features in the Model.
PURPLE TREE INVESTMENT MANAGEMENT Market Strategy Overview: Market Prediction & designing Option Strategies: Next step involves creating a Meta Model, ensemble of all the models discussed above by a method called Stacking. Below figure shows the number of Long or Short monthly trades correctly and incorrectly predicted by the Meta-Model respectively from January, 2013 to July, 2018 with an overall accuracy score of 85.07%. Accuracy Matrix of the Meta Model 60 8 50 Total Trades 40 44 30 2 20 13 10 0 Long Short Long/Short Correct Incorrect
PURPLE TREE INVESTMENT MANAGEMENT Market Strategy Overview: Purple Tree’s Index Options positions are typically net – • Theta Positive, • Gamma Negative, • Delta Positive and • Vega Negative. Risk & Trade Management: Draws on Purple Tree’s deep expertise in risk management: • Multi-faceted approach to risk, assessing a wide range of factors • Navigated a number of major crises • Shorter and shallower drawdowns than those experienced by equities Purple Tree invests only in NIFTY 50 and BANKNIFTY index Options as these indices offer natural hedging to unsystematic risk through diversification which they offer. NIFTY 50 index: The Index tracks the behaviour of a portfolio of blue chip companies, the largest and most liquid Indian securities. It includes 50 of the approximately 1600 companies listed on the NSE, captures approximately 65% of its float-adjusted market capitalization and is a true reflection of the Indian stock market. BANKNIFTY index: The BANKNIFTY index represents the 12 most liquid and large capitalised stocks from the banking sector which trade on the National Stock Exchange (NSE).
PURPLE TREE INVESTMENT MANAGEMENT Market spending 66% of time in correction/sideways movement 14000 12000 10000 8000 6000 4000 2000 0 Indicates correction and sideways price movement
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