Flows-based Pairs Trading

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20 January 2009                                               Flows-based Pairs Trading

 S&P 500: Opened Trades
 We have opened one new trade:

                      > Long IAC/InterActiveCorp (IACI), short Family Dollar Stores Inc (FDO)

 Featured Pairs Trade:
  Chart 1: IAC/InterActiveCorp and Family Dollar                                Chart 2:        IAC/InterActiveCorp and Family Dollar
           Stores Inc                                                                           Stores Inc implied volatility

              100%                                                                  110                     IAC/InterActiveCorp
                                                                                                            Family Dollar Stores Inc
              80%                                                                   100
              60%                                                                    90
              40%                                                                    80

              20%                                                                    70
              -60%                                                                   40    implied volatility (%)
              -80%                                                                   30
                 Oct-96   Mar-99   Sep-01   Feb-04   Aug-06   Jan-09                  Oct-08            Nov-08         Dec-08          Jan-09

 Source: State Street Global Markets, Bloomberg                               Source: State Street Global Markets

 See page 2 for further details.

   Pairs Trading relies on identifying assets that move together over the long term, but have diverged in the short term. The strategy then
   profits when the relationship mean reverts. The biggest risk to this approach is that financial relationships can change such that a
   structural break occurs. State Street’s unique insights into institutional investor behaviour provide one way to reduce this risk. For
   example, if institutions continue to sell the underperforming asset then we judge the risk of a structural break too great to implement a
   Pairs Trade.
   Please refer to ‘Flows-based Pairs Trading (12 May 2008)’ for further details.

                                                                                                         Please see important disclosures on page 3

                                                       RESEARCH                                                                     Flows-based Pairs Trading

New Position 1: Long IAC/InterActiveCorp (IACI), short Family Dollar Stores Inc (FDO)
The prices of IAC/InterActiveCorp and Family Dollar Stores Inc have historically traded in line with one another (the ADF statistic of
their price relative is -4.5). IAC/InterActiveCorp has significantly underperformed Family Dollar Stores Inc such that the price relative
has diverged by more than two standard deviations, 51.4%, from its long-run equilibrium. Furthermore, weekly Flows into Internet
Software & Services are stronger than those into Multiline Retail. Our framework therefore recommends a long IAC/InterActiveCorp,
short Family Dollar Stores Inc position.

  Table 1:               Descriptive Statistics
   Descriptive                          Tkr         Curr.           Price     Mkt Cap         Beta               Implied          Report        Ex-Div.       Industry
                                                                               ($ bn)                               vol            Date          Date
   IAC/InterActiveCorp                 IACI         USD             15.1         1.7           0.5                 49%            06 Feb           -          Internet Software &
   Family Dollar Stores Inc            FDO          USD             28.4            4.0        0.8                       49%      03 Apr        11 Mar        Multiline Retail

Source: State Street Global Markets, Bloomberg. Note: Prices as of open 19 Jan 09

  Chart 3:            IAC/InterActiveCorp and Family Dollar                                        Chart 5:                    Internet Software & Services & Multiline
                      Stores Inc                                                                                               Retail normalized Flows

             45               IAC/InterActiveCorp                50                                                      1.5               Internet Software & Services
             40               Family Dollar Stores Inc, rhs      45
                                                                                                                         1.0               Multiline Retail
             35     price (USD)                                  40
                                                                 35                                                      0.5
             25                                                                                                          0.0
             20                                                                                                      -0.5
             15                                                  15                                                  -1.0
             10                                                  10
                                                     price (USD)                                                     -1.5
             5                                                   5
             0                                                   0                                                   -2.0
             Oct-96    Mar-99     Sep-01   Feb-04    Aug-06 Jan-09                                                      Oct-08 Oct-08 Nov-08 Dec-08 Dec-08 Jan-09

Source: State Street Global Markets, Bloomberg                                                   Source: State Street Global Markets

  Chart 4:            IAC/InterActiveCorp relative to Family                                       Chart 6:                    Internet Software & Services vs.
                      Dollar Stores Inc                                                                                        Multiline Retail Flows differential

             100%                                                                                               3.0
             80%                                                                                                2.5
             60%                                                                                                2.0

              0%                                                                                                0.0
             -20%                                                                                              -0.5
             -40%                                                                                              -1.0
             -60%                                                                                              -1.5
             -80%                                                                                              -2.0
                Oct-96    Mar-99    Sep-01    Feb-04        Aug-06     Jan-09                                     Oct-08         Oct-08     Nov-08    Dec-08     Dec-08   Jan-09

Source: State Street Global Markets, Bloomberg                                                   Source: State Street Global Markets

  Table 2: Valuation & Performance Statistics
  Valuation                                                 P/E             P/BV          P/BV rel                  Div.          Payout          ROE          Debt /        LT
                                                                                          (5y avg)                  yield          ratio                       Equity      Growth
  IAC/InterActiveCorp                                       16.1x           0.51x           -58%                      -              -             3%           11%        10.0%
  Family Dollar Stores Inc                                  15.2x           3.06x           2%                      2.0%           30%            20%           20%         11.6%

  Performance & Sentiment                                    1w              1m             3m                       YoY           BB             Buy /           #        Δ EPS
                                                                                                                                  rating          Sells       analysts      est.
  IAC/InterActiveCorp                                        1.1            -7.4           -0.9                     -28.1         3.4 / 5         5/2            17         0%
  Family Dollar Stores Inc                                   3.3            12.2           15.2                     60.5          3.2 / 5         5/3            18         4%

Source: State Street Global Markets, Bloomberg

For the latest research, visit                                   20 January 2009                                                                                 page 2

                                                        RESEARCH                                                         Flows-based Pairs Trading

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Risk Warning
Past performance is not necessarily indicative of future results. In addition the price and/or value of and income derived from any particular security may vary because of
changes in interest rates, foreign exchange rates, operational or financial conditions relating to a specific issuer or other factors. Investors may therefore get back less than
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State Street Global Markets believes, for the sole purpose of complying with the disclosure rules of the Financial Services Authority, that when both stocks are traded together
as a pair, the long position corresponds to a Buy recommendation and the short position to a Sell recommendation.
However, because the quantitative model is based on the relative attractiveness of one security compared to another, the long / short recommendation can not be directly
equated to buy and sell categories for each stock individually. Accordingly both stocks must be traded concurrently and your decision to buy or sell a security should be based
on your individual investment objectives and only after evaluating the expected absolute performance of the relevant security.

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For the latest research, visit                                20 January 2009                                                                                 page 3

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