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Japan Equity Market Neutral 
Japan Equity Market Neutral
Asset Class/Style: Japanese Equity Absolute Return
The Japanese Long Short Market Neutral strategy seeks a total return that exceeds the Japanese risk-free rate by 6% to 8% annually. The strategy also seeks to maintain overall volatility at 4% to 7%, as measured by the annualized standard deviation of monthly returns.

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Japanese Equity Market Neutral GIPS Disclosure
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Investment Process
Product Assets as of 6/30/2010: $317 MM
Strategy Overview
The objective of this strategy is to generate returns through exploitation of relative inefficiencies in the Japanese equity market. The attractiveness of a security is determined using a disciplined valuation approach which takes into account factors related to valuation, growth prospects, liquidity, and risk. However, the desirability of these characteristics changes based on the business cycle and economic conditions. By identifying these changes using an adaptive valuation model, we are able to systematically identify attractive relative valuation opportunities. These relative valuations are exploited by building a long short portfolio based on their relative attractiveness that has minimal systematic market exposure. Performance is therefore driven purely by the performance of the valuation model and is only minimally affected by market-wide factors.

Adaptive Valuation Process
There are two core beliefs underlying our adaptive valuation process. First, we believe that a security's attractiveness is driven by a multitude of factors. Rather than take shortcuts, we use modern technology to build multi-factor valuation models that reflect the underlying complexity of stock valuation in a disciplined fashion. Our strategy analyzes over 40 factors that impact Japanese equity prices.

Second, we believe that the desirability of a security's characteristics change with economic conditions. Building adaptive valuation models that reflect this reality enhances our ability to generate consistent returns. The model assigns relative weightings to each characteristic; desirable characteristics (for example the forecast growth rate in earnings) will have positive weightings and undesirable characteristics (for example, the ratio of price to operating cash flow) will have negative weightings. Without such specific quantified weights, it is impossible to make tradeoffs between the different characteristics and come up with a valuation that systematically incorporates all the relevant information about a company. The weights will help identify the relative attractiveness of each stock in the investment universe.

Risk Control
One way to exploit the power of our valuation model is to have a long position in the most attractive stocks and a short position in the least attractive stocks. However, such a portfolio would have non-zero exposure to industries and would not necessarily be neutral to a variety of market factors. Building a portfolio that is relatively insensitive to systematic effects - i.e. "market neutral" - requires the use of an optimization process that is capable of making the tradeoff between the expected reward and the various dimensions of risk that need to be controlled.

Volatility Target and Beta Neutral
The volatility or standard deviation of a market neutral strategy is a function of the tracking error between the long portfolio and the short portfolio. This is targeted to be between 5% and 6% on an annual basis. The overall beta of the combined portfolio versus the Japanese equity market is targeted to be near zero.

Market Cap Neutral
Numerous studies have demonstrated the differences in risk between small capitalization stocks and large capitalization stocks. The long run return differential between these stocks represents a risk premium for bearing the higher risk associated with small capitalization stocks. However, since the objective of this strategy is to exploit market inefficiencies, we maintain the average market capitalization of the long portfolio to be the same as that of the short portfolio.

Sector Neutral
Our research indicates that the risk-adjusted value added from forecasting relative sector performance is limited. This is due to the fact that shocks to the economy have widely differential effects across sectors. As shocks are almost always unpredictable, the risk associated with taking large active sector positions is substantial. Thus, the portfolio is maintained to be sector neutral - i.e., the sector exposure of the long portfolio is constrained to be identical to that of the short portfolio.

Stock Specific Risk Budgeting
Stock returns are often driven by company-specific events. Takeovers, product liability issues, and poor accounting practices are just some of the events that can have a dramatic impact on a company's stock price. Such events are unpredictable, and we strive to minimize the impact of such events by limiting the risk budget allocated to a particular company. By using an explicit risk budgeting process, we are able to manage for the differential risk of a stock.



Performance
Annualized Returns As of 6/30/2010 
*3 Month returns are not annualized.
**Inception Date: 3/1/2002

Gross and net performance stated above reflects the deduction of brokerage commissions and expenses incurred to manage the portfolio, and the reinvestment of dividends and other income. Gross performance does not include the deduction of investment management fees. Please refer to the full disclosure statement located at the top of this page. Past performance is not a guarantee of future results.

Performance figures are unaudited and subject to change.

All institutional product information has been provided by Analytic Investors, LLC. Any questions about this material or requests for additional information should be made directly to the firm at info@aninvestor.com
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