Fairfield Sigma 3X Leveraged Certificates
Access to one of the most successful hedge funds with the added benefit of dynamic leverage
Produced by Nomura and NPB
SEPTEMBER 2006
NPB New Private Bank Ltd Nomura Altrus
Incorporated in 2001, the NPB New Private The Nomura Group is a global financial The Equity and Fund Derivatives team at
Bank Ltd. (NPB) is an independent Swiss asset services firm dedicated to providing a broad Nomura is dedicated to providing clients with
management bank that serves private as well range of financial services for individual, tailored investment solutions. The Altrus
as institutional clients – mainly in Switzerland institutional, corporate and government platform combines the efficient, structured
and Continental Europe. The four founding clients. Founded in 1925 in Osaka, Japan, solutions of the derivatives markets with the
partners see themselves more as Nomura has over 15,000 employees across a high level of before, during and after-sales
entrepreneurs than as traditional bankers. global network of offices in 29 countries. The service that usually is associated with asset
Their guiding principle is to act as a trusted Group’s business activities include investment management. Products are presented under
partner to their clients in order to make use consultation and brokerage services for retail the Altrus brand to highlight the strong
of the opportunities that constantly arise in investors in Japan, and, on a global basis, standard of bespoke development and service
today's complex and rapidly changing markets. brokerage services, securities underwriting, that goes into each offering. Altrus products
In recent years, NPB has achieved a fine investment banking advisory services, are hallmarked by innovative underlyings and
reputation as an independent distributor of merchant banking and asset management. made-to-measure structures that can be
customised structured products, attuned to distributed in a variety of formats such as
For further information about Nomura,
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please visit www.nomura.com.
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www.npb-bank.ch. Equity and Fund Derivatives team and the
Fairfield Sigma 3X Leveraged Certificates,
please visit www.altrus.com.
Benefiting from positive momentum
The Fairfield Sigma 3X Leveraged Certificates (the Certificates) The Certificates provide:
offer investors access to the performance of Fairfield Sigma 3X leveraged exposure to the performance of
Limited (the Fund). The Fund is a feeder fund that invests Fairfield Sigma Limited2
primarily in one of the most successful hedge funds in the market,
Fairfield Sentry Limited (the Master Fund) (USD denominated). Dynamic leverage, which aims to increase
The Fund also hedges the resulting dollar exposure into euros. exposure to positive performance and to
Ultimately the performance of the Certificates is linked to the reduce exposure to negative performance3
Master Fund adjusted for the euro/dollar hedging done at the The security that investors cannot lose more
Fund level. The Certificates are dynamically leveraged to increase than their initial investment under any
potential returns in periods of good performance, while reducing circumstances (even with the leverage feature)
possible losses in periods of poor performance.
Daily liquidity
The Master Fund has employed a split-strike conversion strategy*
since inception in 1990 and consistently has achieved above Product sponsorship by NPB, New Private
average uncorrelated returns with very low volatility.1 Unlike many Bank, Zurich
others, the Master Fund does not seek to achieve future returns
based on academic analysis of past performance, but instead
focuses on identifying and profiting from short periods of positive
momentum in large-cap U.S. equities on a hedged basis.
The Master Fund’s objective is to seek investment returns that
provide long-term capital appreciation by delivering repeated
short-term gains that are uncorrelated to market movements
and trends.
* Please see page 5 for a detailed description of the strategy.
1
Fairfield Greenwich Group Fairfield Sentry Limited
Founded in 1983, Fairfield Greenwich Group's (FGG), mission is A successful investment philosophy, which combines capital preservation
to offer its clients superior alternative asset management funds. with wealth creation
Throughout its history, FGG has internally managed its own
Since the Fund invests in the Master Fund (together with its currency hedging)
hedge funds and selectively identified external managers for
the relevant key data is that of the Master Fund.
strategic affiliations. For risk monitoring purposes, FGG obtains
portfolio transparency from all managers that are included in its Fund objective: to achieve consistent absolute returns, while limiting risk by
multi-strategy funds. They seek to align their interests more fully identifying and profiting from short periods of positive momentum in large-cap
with those of their clients by investing a significant portion of U.S. equities on a hedged basis.
their own shareholders' capital with their managers.
FGG has approximately USD 10 billion in client and firm assets Key features of Fairfield Sentry Limited:
under management. It is an employee owned firm with over 85
Over 15 years of track record Manager registered with the SEC
employees, 13 of whom are shareholders, and has offices in New
York, London and Bermuda, and representative offices in the U.S., 11.08% annualised returns4 Active risk management
Europe and Latin America. FGG related funds have over 900 2.54% annualised standard deviation5 Combination of stock and
registered shareholders, including private banks, financial advisors, Worst monthly drawdown since equity index options
family offices, pension funds, government authorities and inception of -0.64% Market risk is hedged
institutional investors. Fund assets of USD 4.8 billion 6 approximately via put options
Some FGG entities are registered with the U.S. Securities & Invests in liquid instruments The Fund alternates between
Exchange Commission (SEC) as an investment advisor and broker periods of investment in the
S&P 100 Index stocks
dealer or with the U.K. Financial Services Authority (FSA) as an strategy and periods of non
S&P options investment waiting for the next
investment manager.
U.S. Treasury Bills implementation cycle
2
Fairfield Sigma 3X Leveraged Certificates
Leveraged exposure to the performance of an actively managed portfolio The Fairfield Sigma 3X Leveraged
Certificates offer three major advantages:
For every certificate purchased (value EUR 10,000), Hypothetical Index performance (EUR) Access – to one of the most successful hedge
investors receive EUR 30,000 worth of exposure to the 220
Fairfield Sigma Limited funds with the added benefit of dynamic
Fund’s performance on the Issue Date. As a result,
200 Fairfield Sigma 3X Dynamic Leveraged Index leverage
initially, an investor will participate three times in any
change to the Fund’s Net Asset Value (NAV). 180 Liquidity – although shares in the Fund may
160 only be sold back to the Fund on a monthly
If the Fund fails to deliver the positive performance
EUR
basis, Nomura intends to make a daily market
expected, the Certificates’ exposure to the Fund’s 140
in the Certificates
performance will be reduced accordingly. 120
Leverage – unlike a direct investment in the
Positive performance by the Fund will lead to increased 100
Fund, where the level of exposure to the Fund
exposure (targeted at three times). 80 is fixed, the Certificates provide a dynamically
Jul 01 Feb 02 Sep 02 Mar 03 Oct 03 Apr 04 Nov 04 May 05 Dec 05 Jul 06
adjusted level of exposure to the Fund’s
40
Outperformance
performance, by increasing exposure when the
35 Fund is performing well and reducing exposure
30 should the Fund fall in value
25
EUR
20
15
10
5
0
Jul 01 Feb 02 Sep 02 Mar 03 Oct 03 Apr 04 Nov 04 May 05 Dec 05 Jul 06
Source: Nomura International plc, August 2006. All performance data is calculated in EUR.
The above graph is based on backtesting. This means that the Index performance shown above
is purely hypothetical and should in no way be construed as a projection of future returns.
3
How the dynamic leverage feature works
The Certificates track the performance of the Fairfield Sigma 3X Dynamic Rebalancing
Leverage Index (the Index), which uses a pre-defined algorithm to adjust its
The leverage factor is calculated as the value of the shares of the Fund in the Index divided by
leveraged exposure to Fairfield Sigma Limited according to the Fund’s
the overall value of the Index. At inception, the leverage factor is set at 3 which corresponds
performance. The algorithm also ensures that there is no contingent liability,
to an initial value of the shares in the Fund in the Index equal to 300.
meaning that investors will not be obliged to invest additional capital under
any circumstances. If the Fund goes up in value, the leverage factor falls. The amount borrowed is then increased
and this additional amount is invested in fund units, in order to maintain a leverage factor of 3.
The Index consists of shares in the Fund as well as a borrowed amount to
finance the leverage. The amount borrowed is increased daily to reflect the If the Fund decreases in value, the leverage factor rises. The amount invested in fund units is
interest charged on this borrowing, which is at a rate of one month then decreased and the amount of this reduction is used to reduce the theoretical
EURIBOR plus 120 basis points (the Leverage Rate). Initially, the Fund will borrowings, in order to maintain a leverage factor of 3.
receive a weighting of 300% in the Index and the amount borrowed will
For example, in the case of a 12% positive performance of the Fund the value of the shares of
receive a weighting of 200%.
the Fund in the Index would be 336. In the case of a negative performance of -10%, the value
The official level of the Index (the Index Level) for any day will be of the shares of the Fund in the Index would be 270.
determined by the Index Sponsor (Nomura International plc) as the value of Value of the Amount Index Leverage Adjustment New
the shares of the Fund in the Index, net of the Index Adjustment fee, minus shares of borrowed Level Factor to amount Leverage
the value of the amount borrowed. the Fund in borrowed Factor
the Index
Fund up 336 200 336 – 200 336 200 + 72 (336+72)
= 2.47 =3
12% = 136 136 = 272 136
Fund down 270 200 270 – 200 270 200 – 60 (270-60)
10% = 70 70 = 3.86 = 140 70 =3
Please note the calculations in the above table do not take into account management fees or interest on the amount borrowed.
4
Advantages of dynamic leverage as compared to *Split-strike conversion strategy
traditional leverage The establishment of a typical position entails (i) the purchase of a basket of
The dynamic, monthly-adjusted leverage embedded in the securities that are intended to highly correlate to the S&P 100 Index, (ii) the
Certificates offers significant advantages compared to more purchase of out-of-the-money S&P 100 Index put options with a notional
usual, non-dynamically leveraged investments. value that approximately equals the market value of the basket of securities
and (iii) the sale of out-of-the-money S&P 100 Index call options with a
Using traditional leverage, the amount borrowed remains fixed
notional value that approximately equals the market value of the basket of
throughout the life of the investment. No adjustment is made
securities. The basket typically consists of between 35 to 50 stocks in the
to the amount borrowed or to the exposure, irrespective of
S&P 100 Index. The purpose of the purchase of the put options is to limit
how the investment is performing. Consequently, if the
the market risk of the basket at the strike price of the purchased puts. The
underlying investment increases in value, the leverage factor
purpose of the sale of the call options is to largely finance the cost of the
becomes reduced as a result. Conversely, if the investment falls
put hedge and to increase the stand-still rate of return. The degree of
in value, the leverage factor increases.
bullishness of the strategy can be expressed by the strike prices in the S&P
Therefore, by constantly adjusting the Index to respond to 100 Index put and call options. The farther away the strike prices are from
changing market conditions, the Certificates have the potential the price of the S&P 100 Index, the more bullish the strategy.
to perform better than a traditional leveraged product.
Hypothetical S&P 100 Index Level
In addition, should the Fund perform poorly, the exposure to
Ceiling established by call options
the Fund’s performance is reduced in accordance with the
dynamic leverage algorithm, ensuring that investors cannot lose
more than the purchase price paid for the Certificates.
Purchase Basket of Stocks
.
Floor established by put options
550 555 560
S&P 100 Index
5
Limitations and risk factors
The value of investments, such as this security, and any income that may be
Neither the Issuer nor Nomura have performed or will perform on your behalf any
paid from it, can go down as well as up and as such you may not get back the
investigation or review of the reference asset(s) this security is linked to. You should
amount you initially invested. In some circumstances you may not receive any
understand the reference asset(s) in detail before deciding whether to invest in this
amount back from this investment. The Nomura Group of companies (Nomura)
security therefore you may wish to perform such investigation yourself or arrange
is not providing you with any advice regarding this security, or acting in any
for your advisors to do so for you. Any information presented to investors in
form of fiduciary capacity. Therefore you should only decide to purchase this
connection with this security is based only on publicly available information
security after careful consideration together with your legal, tax, accounting,
concerning the reference asset(s) and not for example on any investigation Nomura
financial and other advisers. Certain risks that may apply to this security are
may have performed on its own behalf. The reference asset(s) may be subject to
summarised below, any number of these risks could apply at once which could
change during the life of the security for example to respond to corporate actions
increase their effect on the value of the security. More information on these
or market disruption events that may occur. An investment in securities does not
risks is available in the full legal documentation of this security which will
give rise to any rights of ownership or other interests in any assets comprising the
typically consist of an offering circular and a pricing supplement. There will be a
reference asset.
section of this documentation marked Risk Factors that you should pay special
attention to and make sure you understand before purchasing the securities. If As holder of these securities you will assume and be responsible for any and all
you do not already have such documentation you can request a copy from the taxes of any jurisdiction or governmental or regulatory authority that may be
distributor you are considering purchasing the securities from, or from Nomura payable in respect of these securities. Therefore before purchasing you should
International plc. There may be other risks and other considerations not listed consider your tax position and consult with your tax advisors as you deem
below that you also need to consider before investing in these securities. You necessary.
should also bear in mind that holding this security is not equivalent to owning
These Certificates have a leveraged exposure to the underlying asset and as such
any of the reference asset(s) to which it may be linked.
any movement in the value of the underlying asset will cause a greater movement
Nomura is a financial services group and as such members of the group may in the value of the certificate which will result in greater gains or losses for the
from time to time perform investment banking or other services, or may have investor than if the investment had been in the underlying asset and had not been
a position or act as market maker, for or in connection with the securities or leveraged. The Certificates are not capital protected, therefore you could lose your
related investments mentioned herein. In addition, Nomura may possess or entire investment if the reference asset(s) falls a sufficient amount to a value which
acquire material information which may affect the value of these securities may be above zero. Unlike a direct investment Certificates usually have a fixed
which it will not be able to disclose to you for reasons of client confidentiality maturity date where they will automatically be redeemed. Prior to this date the
or otherwise. All of these activities may therefore cause or lead to potential only way to sell Certificates will be to a market maker at their bid price. It is likely
conflicts of interest with Nomura's role in these securities. that Nomura International plc will be the only market maker and Nomura
International plc makes no assurance that any bid price will be indicated or if a price
is indicated at what level it will be relative to any theoretical valuation of the
Certificates or to the price at which you bought the Certificates.
6
Offer and sales restrictions Footnotes
1
This document is furnished at the request of the recipient for the exclusive purpose of identifying the Correlation describes the relationship between two items. A
value of 1 means both items behave in entirely the same way (i.e.
nature of the security referred to herein. It must not be copied, given or shown to any other person. It if one index rises, the other index rises to an identical degree). A
is furnished for the private information of the recipient with the express understanding, which the value of -1 means the behaviour of both items is exactly opposite
recipient acknowledges, that it does not constitute an offer of such security or a means by which such (i.e. if index A rises by 2%, then index B would drop 2% over the
same time period. A value of 0 means that both items behave
security may be offered or sold. wholly independently of each other (i.e. there is no movement
either in the same or the opposite direction). Volatility is the
The terms outlined herein are indicative only and are subject to change. The full terms and conditions of degree to which the price of an underlying security tends to
the security are contained in the Offering Circular and Supplement for the security, which are available fluctuate over time.
free of charge at the address below. While we consider the information herein reliable, we do not 2
The Certificates are designed for investors who have a positive
represent that it is accurate or complete and it should not be relied upon as such. view of the Fund and who wish to gain more exposure to the
Fund than they could achieve through a direct investment. The
This document is issued in the U.K. by Nomura International plc (1 St. Martin’s-le-Grand, London, EC1A Certificates aim to offer 3 times leveraged exposure to the Fund
with an assurance that investors will not lose more than their
4NP), which is authorised and regulated by the Financial Services Authority. This document may only be
initial investment.
distributed in compliance with all applicable laws and regulations in a manner which will not impose any 3
Like most other assets, the value of the Certificates may fall as
obligation in relation to approval, registration or otherwise, on Nomura and/or its affiliates. well as rise during their life. The use of leverage can also magnify
losses as well as gains and increase volatility throughout the life
Copies of the prospectus can be requested from BNP Paribas Securities Services, Grueneburgweg 14, of the Certificates.
60322 Frankfurt am Main. 4
Source: Fairfield Greenwich Group, August 2006. Annualised
returns are calculated over a period since inception.
5
Source: Fairfield Greenwich Group, August 2006. Standard
Deviation is calculated over a period since inception.
6
Fund assets recorded as at July 2006.
7
See footnote 2.
8
See footnote 3.
7
Summary of indicative terms
The terms set out herein are indicative only. Any investment in the Fairfield Sigma 3X Leveraged Certificates will be on the terms set
out in the Offering Circular from 17 June 2005 and Pricing Supplement from 8 September 2006 (together with the Prospectus).
Prospective investors are advised to review the Prospectus in full, including the Terms and Conditions contained therein, for the final
terms of the Certificates. To the extent of any inconsistency between this summary and the Prospectus of the Fairfield Sigma 3X
Leveraged Certificates, the Prospectus will prevail.
The Certificates are based on the Fairfield Sigma 3X Dynamic Leverage Index, which consists of an asset (units in Fairfield Sigma
Limited) and a liability (borrowed amount to finance the leverage). Initially, the first component (asset) is given a weighting of 300%,
the second (liability) a weighting of 200% (so that asset minus liability equals 100%).
Issuer Nomura Bank International plc
Guarantor Nomura Securities Co., Ltd.
Guarantor Rating A by S&P
Index Fairfield Sigma 3X Dynamic Leverage Index
Subscription Price EUR 10,000
Denomination EUR 10,000
Subscription Start Date 11 September 2006
Issue Date 22 September 2006
Value Date 25 September 2006
Dynamic Leverage 16 October 2006
Index Start Date
Valuation Date 17 October 2011
Certificate Settlement Amount EUR 10,000 * If / 100
8
Fairfield Sigma 3X
Final Dynamic Leverage The Dynamic Leverage Index Level on the Valuation Date
Index Level (If)
Leveraged Certificates
Initial Dynamic Leverage The Dynamic Leverage Index Level on the Dynamic Leverage Index Start Exposure to the performance of Fairfield
Index Level (Ii) Date, which will be set at 99
Sigma Limited7, 8
Settlement Date 10 Business Days after the Valuation Date
Index Adjustment Fee 1.50% per annum Dynamic leverage to increase and reduce
Leverage Rate 1 month EURIBOR plus 120 basis points exposure according to performance
Liquidity Daily Low correlation to global markets
ISIN DE000A0KQXQ1
High probability to outperform Fairfield
German Security Identification A0KQXQ
Number (WKN) Sigma Limited
Listing An application will be made to list the certificates in the Freiverkehr Daily liquidity
section of the Frankfurt and Stuttgart Stock Exchanges
Price Information www.altrus.com, Reuters
NPB New Private Bank Ltd.
Limmatquai 122
8001 Zurich
Switzerland
T. +41 44 265 11 88
F. +41 44 265 11 89
www.npb-bank.ch
Nomura International plc
1 St. Martin’s-le-Grand
London
EC1A 4NP
United Kingdom
T: +44 (0) 20 7521 5757
F: +44 (0) 20 7521 3511
www.altrus.com