BULLERO ALPHA STRATEGY
August 2013
Overview

We are launching an absolute return PMS product from September 2013

We are different - we construct a portfolio with a blend of
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Market neutral alpha generating strategies
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Blue chips bought only at distress valuations – we believe the market may offer such
opportunities in the run up to the elections

Our source of return is not market timing, or long-only investments
We view stringent risk management as a key driver to sustained performance in
financial markets
Initial proprietary capital commitment to strategy from Bullero – INR 10 million
The team at Bullero Capital has over 45 years of combined experience in the Indian
financial markets
History and vision
Bullero Capital is promoted by the Khandelwal family based out of New Delhi. The
family has a rich history in the financial markets. The original family firm, Narayandas
Khandelwal & Co was one of the founder members of the Calcutta Stock Exchange.
The group took membership of the National Stock Exchange in 1995 under Archna
Securities Pvt Ltd which extended till 2003. Since then, the shift had focused to
maintaining a proprietary book and expanding exposure to real estate.
We intend on developing our asset management business via the Portfolio
Management license and grow our AUM to about Rs 100 crore under the absolute
return strategy gradually
The next step will be setting up of a closed AIF fund to trade across all asset classes –
equities, currencies, commodities, fixed income – with potential for leverage.
Management philosophy
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We are a fiduciary to our clients – client interests come first, always.
We seek to build relationships that are built on principles of trust, truthfulness and
ethical conduct
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We value truth and excellence above all traits – we need to know
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We believe that the economy and markets are continuously changing.
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We pride ourselves on being able to nimbly trade the markets, and strive to deliver
superior risk-adjusted returns to our clients
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Our attempt to deliver superior returns necessitates consistent, focused research to
improve our methods, generate new ideas and work to identify regime changes in
the markets and the economy
Organization chart
Tarun Khandelwal
Chairman
Varun
Khandelwal
Sachin
Chief Investment Officer
Sanchit
Mehdiratta
Analyst
Compliance / Accounts
Shivani Lal
Analyst
Back-office
Personnel
Archna
Khandelwal
Marketing / Strategy
Rabia Sooch
Marketing / Strategy
Investment team
Varun Khandelwal is the principal officer at Bullero Capital. He has been responsible
for managing the proprietary desk spanning equities, fixed income, real estate and
options at Bullero since 2010. Bullero’s proprietary desk holds investment stocks and
runs algorithmic strategies, statistical arbitrage and volatility trades expressed via
options. He has extensively applied his expertise in statistically tested strategies to
enhance investment returns.
Prior to joining Bullero, Varun worked at Oxus Investments under Surjit Bhalla from
2007 to 2010, starting as a research associate and quickly progressing to portfolio
manager. He helped develop investment strategies, portfolio analytics framework and
generating investment ideas for the portfolio.
Varun served as a Visiting Faculty in Finance at Birla Institute of Management
Technology from 2011-2012. He was on the editorial board of Developing Trends, an
institutional macro publication on India. He holds a MSc Economics from the University
of Warwick, UK and a BA (Hons) Economics from Delhi University.
Investment team
Tarun Khandelwal has over 35 years of experience in the financial services industry
as a broker, proprietary trader and investment manager. He specializes in applying the
combination of fundamental analysis and technical analysis to markets. Tarun has
extensive experience in broking, investing and trading. He has a deep knowledge of
financial markets, promoter groups, political alliances, government policies, business
models and corporate governance in India.
Tarun has been running a proprietary trading operation since 2003 till date. Prior to
that, he was running Archna Securities Pvt Ltd, an NSE broker since 1995. Tarun
founded Archna Securities Pvt Ltd in 1992 in Kolkata. Before founding Archna
Securities, he worked in the family firm – Narayan Das Khandelwal & Co – a founding
member of the Calcutta Stock Exchage. He has seen Indian markets develop from their
incipient stages of the outcry system.
Investment team
Sanchit Mehdiratta started his career at Bullero over three years ago as an analyst.
Sanchit specializes in developing mathematical trading models, statistical testing of
trading trading strategies, implementing algorithmic trading solutions and risk
management.
His responsibilities include implementation of portfolio strategies, monitoring portfolio
risk, and the upkeep of our financial databases. He has a degree in Mathematics from
Hans Raj College, University of Delhi.
Shivani Lal has over four years of experience in the financial markets. She started her
career with Bullero in 2009 as an analyst and trader. Her responsibilities include trade
execution, risk reporting and independent implementation and monitoring of risk limits.
She has a degree in Commerce from the University of Delhi.
Investment philosophy
Qualitative
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We invest in blue chip companies trading
at cheap valuations offered by market
declines
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These investment candidates are
estimated within the context of the
domestic and global macroeconomic
factors
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Quantitative
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We believe that innovation is
essential; we apply the latest
investment research and build
proprietary models that are
differentiated from street research
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We take a disciplined, quantitative
approach to finding opportunity,
capturing alpha, managing risk and
assessing performance
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The ability to monitor statistical
index/stock/sector relationships in
real-time provides us with a deeper
understanding and provides unique
trading opportunities
We apply technical analysis to define
entry/exit points from our investment
stocks
Blue chip stocks have stop losses as well;
we believe things can go wrong in any
segment of the market.
Investment strategies
Multifactor models
• Constructs a portfolio of market
neutral positions from the FNO
space based on value, growth,
reversion and momentum
alphas
Pairs Trading
• Basis –stocks have statistical equilibrium relationships
• Trigger –stocks diverge to a statistically significant
extent
• Profit – achieved when stocks converge to equilibrium
Blue Chips
Quasi-arbitrage opportunities
Open offers
• Between different classes of shares with the
same underlying
• Example – Tata Steel EQ and CCPS, Tata
Motors and DVR
De-listings
Merger Arbitrage
Investment process
Step 1:
Macroeconomics
Analysis of global
economic
situation and
capital flows
Top down view of
risk factors,
political cycles,
policy measures
Interest rates,
exchange rates
and other macro
variables
Step 2:
Opportunities
Identified
Proprietary
Quantitative
Models
Arbitrage
Opportunities/
Special Situations
Investment
opportunity in blue
chips at cheap
valuations
Step 3: Portfolio
level analysis
Opportunities
evaluated in the
context of the
overall portfolio
Liquidity and
market structure
related checks
Correlation check
of trading idea
with existing
exposures
Step 4:
Risk Monitoring
and Limits
Risk limits and
parameters
validated
Positions sized
depending on
volatility
Positions
monitored for
profit-booking /
stop-losses
Investment process
Our edge is in our research driven investment process
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Before establishing any positions, the team evaluates a variety of factors not easily
captured by traditional valuation models
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Global business and credit cycles
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Liquidity cycle
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Market technicals
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Political dynamics
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Likely economic policy path
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As a policy, we do not take positions contrary to dominant macroeconomic themes;
we are not a bottoms’ up fund
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The portfolio is a product of ongoing research and risk assessment
Example – pairs trading
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Pairs trading helps generate returns uncorrelated with equity market performance;
they are a useful instrument for diversification of portfolio risk
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We monitor over 1000 intra-sector and inter-sector pairs across different instruments
on a daily basis using our quantitative models
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Our models are proprietary – we do not use the bollinger bang/standard
deviation/correction methods commonly used by the sell side
Pairs trading is usually avoided during earnings season and during periods of market
stress
Example – pair trading
Exit Date Profit (%) Duration
27-May-10
6
7
16-Aug-10
3.9
16
04-Oct-10
4.9
7
25-Nov-10
6.7
11
27-Dec-10
1.3
9
28-Jan-11
4.4
12
18-Feb-11
2
12
12-May-11
1.3
27
25-Jul-11
1
10
13-Oct-11
2
2
02-Dec-11
2.7
3
24-Feb-12
-0.1
10
23-Apr-12
2.3
1
17-May-12
3
11
02-Jul-12
-3.6
21
05-Sep-12
0.4
26
19-Nov-12
1.2
30
15-Jan-13
1.9
1
08-Feb-13
5.3
7
25-Mar-13
4
13
14-Jun-13
1.9
3
25-Jul-13
11.2
23
06-Aug-13
3.6
7
Long
ACC
Ambuja
ACC
ACC
Ambuja
Ambuja
Ambuja
ACC
Ambuja
Ambuja
Ambuja
Ambuja
ACC
Ambuja
ACC
ACC
ACC
Ambuja
ACC
ACC
Ambuja
ACC
Ambuja
Short
Ambuja
ACC
Ambuja
Ambuja
ACC
ACC
ACC
Ambuja
ACC
ACC
ACC
ACC
Ambuja
ACC
Ambuja
Ambuja
Ambuja
ACC
Ambuja
Ambuja
ACC
Ambuja
ACC
Example – quasi arbitrage
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TATA Steel / Corus merger resulted
in the issue of convertible shares that
traded at a discount of about 16% to
18% to the TATA Steel shares; a
riskless arbitrage trade involved
buying the CCPS and shorting the
TATA Steel futures
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Such opportunities present
themselves intermittently, and when
structured properly, offer fantastic
risk/reward trades for the patient
investor
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In the present market, Tata Motors /
DVR offer a similar opportunity with
an added element of risk – there is
no conversion. The relationship can
be statistically modeled and traded
for superior-risk adjust returns
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These trades present us
opportunities to diversify risk and
reduce portfolio/market correlation
Risk management
We believe that without a strictly defined risk management system, even the best
investment strategies may fail to deliver acceptable returns
Risk management is the first step in the integrated investment process. It is a
proactive, ex-ante approach to identify, quantify, and manage risks
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Risk identification: No trade is executed without thorough analysis of all sources
of market and instrument-specific risks
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Risk measurement: Our quantitative, proprietary risk management system
measures risk of each new trade/position from a variety of perspectives
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Stand-alone volatility
Marginal contribution to portfolio volatility – low portfolio correlation preferred
Risk concentration in single name/sector
Risk constraints: Portfolio volatility, diversification, beta, single name crash/open
offer
Risk management
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Multiple strategies, one book: primary risk management is portfolio-wide
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Portfolio PNL, directional risk, and stop level are monitored real-time. We have
volatility targets for our portfolio; if volatility rises, we actively reduce exposure till
portfolio volatility is in target zone
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Beta exposure of the portfolio is re-estimated regularly via our proprietary
quantitative algorithms; we are very sensitive to shifts in the beta of our exposures
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Trading strategies have clearly defined, ex-ante, risk budgets. If these are exceed,
the strategy is decommissioned till performance resurfaces
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Entire portfolio has strict drawdown limits
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7.5% - evaluation of source of losses. If temporary, positions held.
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10% - If same problems persist, we reduce exposure.
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15% - sharp cut in exposure till drawdowns start recovering
Risk management
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Systemic Risk
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We believe systemic risks continue to exist in the global financial system,
particularly in Europe, China and Japan
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We monitor the macro economic conditions, bond markets, interbank money
markets, and yield curves of countries around the world to stay alert to signs of
rise in stress in the financial system
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Lowering of portfolio exposure during periods of triggered systemic risk events
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Crisis offers opportunity – only if you have cash
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Maintenance of conservative portfolio in extreme situations with extensive
application of qualitative analysis
Operational Risk
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Use of offsite systems for operational redundancy
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Duplication of trading and research systems on Amazon AWS Cloud
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Avail services of high quality counterparties with strong financials
Fund structure
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While not a SEBI requirement, we have appointed Kotak Mahindra Bank as
custodians to the fund
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For greater transparency in accounting and handling of client assets
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Fund Accounting – profit/loss, NAV, reporting, etc.
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Client’s Depository and Bank accounts
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Allocation of trades by custodian/fund accountant according to pre-determined
allocation matrix
We are a pure portfolio management firm – only charge management/performance
fees from client
It is not our intention to develop a direct marketing channel; we will market our
products through distribution channels only
Fund structure
Distributor / Broker
Client
Revenue
Accounting
Bullero Capital
Custodian
Kotak Mahindra Bank
Fund reporting
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Kotak Bank has been appointed as the custodian of assets, and clearing
member in cash/derivative segment
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Kotak Bank is also the fund accountant responsible for maintain client
accounts and performance reports
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Client NAV is available on a daily end-of-day basis from Kotak
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The set-up ensures transparency in handling of client assets and reporting
Data infrastructure
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Bullero maintains one of the richest possible datasets on Indian financial markets
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We analyze in real-time market data at the bid/offer level to estimate liquidity
impacts, high frequency trading activity and strength of market moves
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In addition to financial data, we have designed news bots to seek out company
specific news from blogs and financial websites
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Our back testing platforms are developed in-house by us using a combination of R,
Stata, and C++

Self developed systems enable us to avoid the common pitfalls that plague most
users of commercial software such as over fitted trading models, poor live
performance and restrictions on strategies spanning multiple instruments
Terms and service providers
Fees and Charges
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Minimum investment:
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Additional Investments: INR 100,000
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Management fee – 2% up-front
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Performance fee – 20% annually
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Hurdle Rate - none
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High watermark – Yes
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Entry load – none
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INR 2.5 million
Exit load - 5% if withdrawn prior to completion of
first year
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Custodian Fees – 20bps per annual
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Brokerage – industry norms
Service Providers
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Custodian:
Kotak Mahindra Bank
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Fund Accountant:
Kotak Mahindra Bank
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Legal Counsel:
Ankur Sood & Co
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Brokers:
India Infoline Limited
Religare Securities Limited
What is true…and clarifications..
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What is true?
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The strategy is not leveraged as per compliance with SEBI regulations
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The strategy may vary net exposure from 0% to 100% depending on
market conditions and valutions
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Strategy uses a combination of quant, fundamental and technical factors
and what needs clarification….
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Returns may be negative
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This strategy is not a substitute for long-term equity investment portfolio
Contact Us
Varun Khandelwal
Managing Director
Bullero Capital Pvt Ltd
306 ABW Towers
MG Road, IFFCO Chowk
Gurgaon 122 002, India
Mobile: 99719 05678
Phone: +91 (124) 411 0803/04/05
Fax: +91 (124) 400 0806
Email: varun.khandelwal@bullerocapital.com