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Managing Returns and Risk Using Alternative Strategies Tim Lazaris and Brian Huen Red Sky Capital Management.

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Presentation on theme: "Managing Returns and Risk Using Alternative Strategies Tim Lazaris and Brian Huen Red Sky Capital Management."— Presentation transcript:

1 Managing Returns and Risk Using Alternative Strategies Tim Lazaris and Brian Huen Red Sky Capital Management

2 Founded in March 2010 by Timothy Lazaris Employee-owned with CI Financial Approximately $250 million in AUM in four funds Sophisticated high net worth advisors and investors located mostly in Canada Alternative manager with a deep, unique connection to a large public asset management company (Stephen MacPhail is senior member on Board of Directors) Partners Fund launched September 2010, closed in 2013 – today, founders and shareholders represent 45% of the fund assets Partners Fund II launched in 2014 seeded by founders and shareholders Red Sky Canadian Equity Corporate Class – top quartile 2013 Three full-time portfolio managers – worked as a team for six years and 55 years of combined capital markets experience 2

3 Our team TeamBackgroundResponsibilities & Coverage Timothy Lazaris, CPA, CA, CFA President,CEO and CIO 4.0 yrs PM at RSCM 2.5 yrs Portfolio Manager at GMP Investment Management 10 yrs Research Analyst at GMP Securities 5 yrs Research Analyst at RBC Capital Markets (Ranked #1 in Canada by Brendan Woods) Portfolio Construction Capital Allocation Risk Management Compliance Financial Services Technology Telecom, Cable and Media Real Estate Dariusz Nieciecki, CFA Managing Partner 4.0 yrs PM at RSCM 2.5 yrs Associate Portfolio Manager at GMP Investment Management 3 yrs Global M&A at Lehman Brothers/Scotia Capital 2 yrs Equity Research at CIBC World Markets and TD Securities Energy Industrials Healthcare Transportation Brian Huen, CFA Managing Partner 3.5 yrs PM at RSCM 6 yrs on the Institutional Equity Sales desks of CIBC and UBS 2 yrs Private Equity at TD Capital 3 yrs Invest. Banking / M&A at Credit Suisse Trading Consumers Materials Event Driven Merger Arbitrage Peter Cranston - Associate Formerly with CI Investments All Sectors

4 Partners Funds Our firm specializes in North American equities and our disciplined investment process is deeply rooted and focused on risk management. The Partners Fund and Fund II are multi-strategy equity funds Core investments (long bias) Trading strategy (long & short) Market neutral / mergers and arbitrage 4

5 Partners Fund II – launched January 2014 Objectives Closely trace the performance of Red Sky Partners Fund – an absolute return fund, currently closed to new investors Absolute returns in all market conditions Capital preservation Risk management Diversification Superior risk-adjusted returns Risk at/or below the TSX Returns at/or higher than TSX 5

6 Annualized Standard Deviation Since Inception RSPMF 9.5% TSX TR 12.6% 6 Source: Bloomberg, Red Sky Capital Management Red Sky Partners Fund – variance

7 Red Sky Partners Fund – performance 7 Source: Bloomberg, Red Sky Capital Management Growth of $100,000Return Sept 1, 2010 RSPF Series S$135,37735.38% TSX Price Return Index$131,20431.20% TSX Total Return Index$147,15947.16%

8 Core portfolio investment process summary 8 Clarity of tangible objectives – identify a select number of high-conviction, company-specific opportunities that will deliver outsized returns over the next 1-3 years. ____________________________________________________________________________________________ Understand the landscape – years of on-site company visits, ongoing engagement with industry contacts, analysis and industry screens. ____________________________________________________________________________________________ I.Identify the opportunity: Source ideas in the process of ongoing industry due diligence and via industry research II.Fundamental analysis – three primary stages 1.Conduct long-term (5+ years) historical analysis of the company’s fundamental drivers and valuation Creating a mosaic to thoroughly understand, evaluate and compare the company to its industry 2.Evaluate management, strategy and execution Do they do what they say they do? Was their success or failure because of or in spite of themselves? What is their view of their industry and strategy going forward in light of our view of their industry and strategy going forward? 3.Determine intrinsic value by applying some primary valuation measures Discounted cash flow, price relative to normalized earnings power, and private market value III.Present analysis to the entire investment team for review Approved ideas considered for inclusion in portfolio Portfolio constructed at stock-specific level with best risk-adjusted ideas that are consistent with our macro call IV.Risk controls embedded at stock level and portfolio level Chief Investment Officer works with portfolio manager to identify the hedges we can utilize to remove market risk.

9 Multi-strategy portfolio approach 9 Capital Core Trading Market Neutral Fundamental Stock Selection Detailed Due Diligence Continuous Review Sentiment or Momentum Driven Technical Analysis Systematic Stop Losses Event-Driven/ M&A Capturing a Defined Return Complex Review Process Long Bias Long or Short Uncorrelated Capital Allocation Macroeconomic Factors Market Sentiment Fundamental Valuation Capital Allocation Macroeconomic Factors Market Sentiment Fundamental Valuation

10 Portfolio construction 10 Core PortfolioTrading PortfolioMarket Neutral Investment StyleFundamental bottom-upSentiment, technical factorsEvent-driven, merger arbitrage Trade DurationMid and long-termShort-termShort and mid-term Trade SizeLarger (max 5% of fund)Smaller (max 3% of fund)Trade dependent – may deploy leverage Profit & Loss RealizationTarget driven (or change in fundamental thesis) SystematicCompletion of transaction Risk Management ReviewPosition size, liquidity, industry concentration Liquidity and adherence to established stop losses Detailed due diligence Overall, portfolios have had a long bias since inception. When combined with extreme liquidity and short trading, volatility is reduced while allowing markets to stabilize.

11 How do we hedge/manage risk? Liquidity – 90% of portfolio can be converted to cash in three days – very few private investments and rarely brokered deals Listed options – puts, put spreads Short selling – at all times and in all market conditions Macro hedges – index futures both in Canada and the U.S. Commodity hedges – short underlying commodity ETFs and structured products Sell discipline – intrinsic value, thesis changed, make room for new/better idea, price drops create review or stop loss 11

12 Our mutual funds available on CI’s platform 12 CI Canadian Small/Mid Cap Fund Became sub-advisor (with Picton Mahoney) January 1, 2013 AUM approximately $450 million In 2013, return was 21.99% compared to S&P/TSX Total Return of 12.22% Small and mid-cap mandate Invests in companies with a market capitalization of less than $5 billion Best long ideas from Partners Fund that fits the mandate Does not look like the index or the benchmark Able to be materially overweight sectors Able to be completely zero weighting in sectors Able to include some U.S. equities Red Sky Canadian Equity Corporate Class Launched January 1, 2013 AUM approximately $10 million In 2013, return was 27.20% compared to 12.99% for TSX TR – top-quartile fund Best long ideas from Partners Fund No hedging other than liquidity and possible elevated levels of cash (up to 40%) Can short and use options when necessary Both of these funds are managed like a hedge fund and will look to generate absolute returns in all markets. Due to a limitation on shorting, it will not have the same volatility as the Partners funds. Annualized returns located in appendix.

13 Performance metrics Series S (2011–2013) Partners Fund 2011 Return was (1.68%) compared to (8.73%) TSXTR 2012 Returned 4.07% compared to 7.18% TSXTR 2013 Returned 16.57% compared to 12.99% TSXTR Three Year (2011 – 2013) Returned 19.27% compared to 10.54% TSXTR Volatility 7.20% compared to 10.24%* *Using monthly return data 13 Alpha Generation 7.05% (3.11%) 3.58% 8.73% better with approximately 70% of the volatility. Source: Bloomberg, Red Sky Capital Management

14 14 2012 JanFebMarAprMayJuneJulyAugustSeptOctNovDec Year RSPF Series S2.72%1.83%(0.33%)(1.15%)(3.42%)(0.11%)0.61%2.00% 2.47%(0.31%)(0.53%) 0.37%4.07% TSX Price Return4.16%1.54%(1.99%)(0.80%)(6.34%)0.72%0.59%2.44%3.08%0.86%(1.48%)1.59%4.00% TSX Total Return4.37%1.67%(1.63%)(0.60%)(6.14%)1.10%0.80%2.65%3.43%1.07%(1.28%)1.95% 7.18% 2011JanFebMarAprMayJuneJulyAugustSeptOctNovDecYear RSPF Series S 1.93%2.05%2.04%2.19%(1.91%)(1.75%)0.40%(3.99%)(3.90%)3.42%(1.05%)(0.77%) (1.68%) TSX Price Return0.81%4.31%(0.14%)(1.21%)(1.02%)(3.64%)(2.67%)(1.37%)(8.97%)5.40%(0.39%)(2.04%)(11.08%) TSX Total Return0.98%4.44%0.12%(1.02%)(0.87%)(3.33%)(2.49%)(1.21%)(8.65%)5.60%(0.22%)(1.70%) (8.73%) 2010JanFebMarAprMayJuneJulyAugustSeptOctNovDecYear RSPF Series S 1.04%0.91%1.77%3.70% 7.60% TSX Price Return3.82%2.49%2.18%3.79%12.85% TSX Total Return4.09%2.71%2.37%4.09% 13.92% 2013JanFebMarAprMayJuneJulyAugustSeptOctNovDecYear RSPF Series S1.26%(1.29%)0.59%(0.41%)2.84%(0.98%)3.26%(0.95%) 2.38%3.56%3.14% 2.23%16.58% TSX Price Return 2.02%1.08%(0.56%)(2.30%)1.56%(4.12%)2.95%1.34%1.05%4.49%0.29%1.69% 9.60% TSX Total Return 2.25%1.26%(0.19%)(2.07%)1.77%(3.76%)3.19%1.55%1.40%4.72%0.45%1.99% 12.99% Source: Bloomberg LP, Red Sky Capital Management All returns in Canadian Dollars. Red Sky Partners Fund – performance

15 Red Sky Partners Fund II Red Sky Partners Fund I 15 Source: Bloomberg, Red Sky Capital Management Red Sky Partners Funds Series S – performance year to date

16 16 (1)Sharpe ratio calculated using monthly figures (2)Calculations based on returns in local currency. (3) 90% of portfolio can be liquidated using 25% of the 20 day moving average of trading volume Source: Bloomberg, Red Sky Capital Management Since InceptionRSPF Series S TSX Total Return Average Month 0.65%0.85% Best Month 3.88%5.60% Worst Month (3.99%)(8.65%) Win/Loss % 58%67% Sharpe Ratio 1 1.191.10 Current Month (August 2014) Correlation 2 10.53 Standard Deviation 2 6.49%6.16% Days to liquidate 3 3N/A Leverage ratio0.98:1N/A Partners Fund statistics

17 Red Sky Capital Management Top 5 long investment ideas – next 12-18 months NameSectorThesis Current Price * Target Price Expected Return Element Financial (EFN-TSX) Financials Growth Co. with superior management. Partnered with Life Insurance Industry. Filling a large gap in asset based finance after financial crisis. Growth is organic and acquisitive. Rising ROE and exit strategy to sell to large financial institutions. $14.00$19.5039% IGM Financial (IGM-TSX) Financials One of Canada’s largest asset manager and the only one with a large captive sales force. With S&PTSX up 14% IGM’s AUM has grown in market performance and net sales yet shares have underperformed its peers. Dividend yield of 4%+ valuation below peers. If/when Mackenzie Financial goes positive in net sales, multiple expansion is expected. $52.75$65.0028% Apple Corporation (AAPL-NASQ) Technology Producer of the most successful handheld wireless devices including iPhone and iPad. Now entering a totally new segment with iWatch. During innovative periods, Apple performs very well and the iPhone6 refresh cycle is expected to be a great success. Great balance sheet, valuation very defensible and transaction revenue model with Apple Pay could result in multiple expansion. $100.00 $120.0 0 20% Michael Kors (KORS-NASQ) Consumer Michael Kors is a retailer of “affordable luxury” fashion for women and men. The company has been growing dramatically in both new and same store’s sales. Includes North America, Asia and Europe. At the current 15-16 P/E KORS trades at a valuation that does not reflect the growth and profitability potential of the company. $76.50 $100.0 0 31% Elkwater Resources (ELK-TSXV) Energy Elkwater Resources (soon to be Striker Exploration) lead by Doug Bailey is being backed by Neil Roszell (Raging River). We see this as a very early stage with Raging River and with huge return prospect. It was just announced last month, the management team and all-star board of directors are looking for a transformational acquisition of Alberta Viking properties. The team has a multiple disciplinary skill set in exploration, production, finance and capital markets. Above average risk with high return prospect. $0.75$1.75233%

18 Red Sky Capital Management Continuous experienced portfolio management team Partnership with CI Financial Process-driven investments Significant committed capital Active Flexibility 18

19 Red Sky Partners Fund Multi-strategy portfolio approach Absolute returns Superior risk-adjusted returns Alternative to primarily Canadian equities 19

20 Red Sky Capital Management 15 York St, 2 nd Floor Toronto, Ontario, M5J 0A3 Tel: 416.642.2209 Fax: 416.642.0929 Timothy Lazaris Chief Executive Officer/Chief Investment Officer Brian Huen Managing Partner 20

21 Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ®CI Investments, the CI Investments design, are registered trademarks of CI Investments Inc. This communication is published by CI as a general source of information and is not intended to provide personal legal, accounting, investment or tax advice. Facts and data provided by CI and other sources are believed to be reliable when posted; however, CI cannot guarantee that they are accurate or complete or that they will be current at all times. CI and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this presentation. FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO CLIENTS Thank you

22 1 year3 year5 year10 yearSince inception Red Sky Canadian Equity Corporate Class25.3%n/a 22.7%* S&P/TSX Composite Index27.1%---18.1% CI Canadian Small/Mid Cap Fund25.2%11.9%14.9%7.7%7.8%** S&P/TSX Completion Index27.0%9.3%14.1%9.4%n/a*** *December 2012 ** November 1992 ***S&P/TSX Completion Index was created in January 2000 after the launch of CI Canadian Small/Mid Cap Fund in 1992 Source: Paltrak Performance as at August 31, 2014 Appendix – annualized returns

23 Capital Preservation Diversification Risk Management Generate consistent annual investment returns and long-term capital appreciation of the units. Employ active hedging strategies and short positions to maintain a balanced portfolio. Interests of portfolio management team strongly aligned with unitholders. Industry, position, and strategy limits ensure a well diversified portfolio at all times. Core and trading positions limited to a maximum 5% and 3% of AUM respectively. Ability to invest in multiple markets and asset classes provides a unique opportunity. Utilize technology and a rigorous risk management process to minimize portfolio volatility. Strict liquidity metrics are continuously monitored by the portfolio management team. Strict limits on investments in small-caps and private placements. 23 Appendix – risk focus

24 Macroeconomic Analysis Sector / Industry Company Selection / Fundamental Analysis Technical / Market Intelligence Portfolio Construction Identify emerging macroeconomic themes. Identify where we are in the market cycle. Consider social/political landscape and the potential impact on overall investment thesis. Anticipate any changes in key macroeconomic factors that may impact the funds overall investment thesis. Identify those sectors which we believe provide investment opportunities based on our macro analysis. Rigorous fundamental analysis to identify companies well positioned in the context of the macro environment. Bifurcate between short-term trading opportunities and long- term investments. Seek out companies with near-term catalysts that may create significant volatility in the price of the firms’ securities. We respect technicals and triangulate fundamentals, technicals, and market intelligence before establishing a position. Leverage our strong relationships with key market participants to identify best investment opportunities. Sentiment towards an asset, sector or theme is a critical consideration. Identify exit/entry points based on technical factors. 24 Select optimal investment mix of companies, industries and cash. Adhere to strict risk management process. Limit concentration in any one industry and company. Portfolio management system used to continuously monitor overall exposure. Appendix - investment process

25 Appendix - biographies Timothy Lazaris CA, CFA - President & CEO Prior to founding Red Sky Capital Management Inc. (RSCM), Timothy was one of the founders and a managing partner of GMP Investment Management L.P. Before that, he was a Director and one of the early partners of GMP Securities L.P. having joined in March 1998 to establish the Financial Services practice. Prior to GMP, he was a Vice-President at RBC Capital Markets and a Research Analyst. Over his 14 year career as a research analyst, specializing in Financial Services, he achieved high rankings in independent surveys including a number one ranking in Canada as determined by Brendan Woods. Mr. Lazaris is a graduate of the University of Toronto (St. Michaels College) where he earned his Bachelor of Commerce degree and continued his professional education by obtaining his Chartered Accountants (CA) designation while working at Deloitte and his Chartered Financial Analyst (CFA) designation. Mr. Lazaris was a member of the Bishop Strachan School Board of Trustees where he is the head of the Audit Committee and a member of the Investment Committee and is currently a member of the Bishop Strachan School Board of Governors and a member of the Finance Committee. 25

26 Appendix - biographies Dariusz Nieciecki, CFA – Managing Partner Prior to joining Red Sky Capital Management Inc. (RSCM), Dariusz Nieciecki was a Vice-President and Associate Portfolio Manager of GMP Investment Management L.P. (GMPIM) Dariusz was responsible for the development and execution of investment strategies across a wide range of industry sectors utilizing equity, credit and derivative securities. Prior to joining GMPIM, Mr. Nieciecki, was an Associate in the Global Mergers & Acquisitions group at Lehman Brothers and Scotia Capital for approximately 3 years. Mr. Nieciecki advised corporate clients and financial sponsors on various financial advisory mandates including mergers, acquisitions, divestitures, leveraged buyouts and recapitalizations. Prior to that, Mr. Nieciecki worked in the Equity Research Department at TD Securities and CIBC World Markets with a top-ranked analyst. Mr. Nieciecki received his Bachelor of Commerce from Queen's University in 2000 and his MBA from the Schulich School of Business at York University in 2003. Mr. Nieciecki also obtained his Chartered Financial Analyst (CFA) designation in 2005. 26

27 Appendix - biographies Brian Huen, CFA – Managing Partner Prior to joining Red Sky Capital Management Inc. (RSCM), Brian Huen was a Executive Director at CIBC Wholesale Bank in its Institutional Equity Division and spearheaded the Bank's hedge fund efforts. Prior to CIBC, Brian was a Director at UBS Canada in its Institutional Equities Sales Division advising global hedge fund clients on event-driven, risk arbitrage and equity long / short trading strategies. Brian has also held various positions at TD Capital, Credit Suisse and Scotia Capital. Brian holds both a Masters Degree in Business (MBA) and an Honours Business Administration (HBA) degree from the Ivey Business School at the University of Western Ontario. He is also a Certified Management Accountant (CMA) and a Chartered Financial Analyst (CFA) charterholder. 27

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