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J.P. Morgan Alternative Index Multi-Strategy 5 (USD)
Structured Investments
Free Writing Prospectus
Filed Pursuant to Rule 433
Registration Statement No. 333-155535
October 11, 2011
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Important Information
JPMorgan Chase and Co. ("J.P. Morgan") has filed a registration statement
(including a prospectus) with the Securities and Exchange Commission (the
"SEC") for any offerings to which these materials relate. Before you invest in
any offering of securities by J.P. Morgan, you should read the prospectus in
that registration statement, the prospectus supplement, as well as the
particular product supplement, the relevant term sheet or pricing supplement,
and any other documents that J.P. Morgan will file with the SEC relating to
such offering for more complete information about J.P. Morgan and the offering
of any securities. You may get these documents without cost by visiting EDGAR
on the SEC Website at www.sec.gov. Alternatively, J.P. Morgan, any agent, or
any dealer participating in the particular offering will arrange to send you
the prospectus and the prospectus supplement, as well as any product supplement
and term sheet or pricing supplement, if you so request by calling toll-free
(800) 576-3529.
To the extent there are any inconsistencies between this free writing
prospectus and the relevant term sheet or pricing supplement, the relevant term
sheet or pricing supplement, including any hyperlinked information, shall
supersede this free writing prospectus.
Securities linked to the J.P. Morgan Alternative Index Multi-Strategy 5 (USD)
(the "Index") are our senior unsecured obligations and are not secured debt.
Investing in these securities is not equivalent to a direct investment in the
Index or any strategy that forms part of the Index.
Investments in securities linked to the Index require investors to assess
several characteristics and risk factors that may not be present in other types
of transactions. In reaching a determination as to the appropriateness of any
proposed transaction, clients should undertake a thorough independent review of
the legal, regulatory, credit, tax, accounting and economic consequences of
such transaction in relation to their particular circumstances. This free
writing prospectus contains market data from various sources other than us and
our affiliates, and, accordingly, we make no representation or warranty as to
the market data's accuracy or completeness. All information is subject to
change without notice. We or our affiliated companies may make a market or deal
as principal in the securities mentioned in this document or in options,
futures or other derivatives based thereon.
Any historical composite performance records included in this free writing
prospectus are hypothetical and it should be noted that the constituents have
not traded together in the manner shown in the composite historical replication
of the indices included in this free writing prospectus. No representation is
being made that the indices will achieve a composite performance record similar
to that shown. In fact, there are frequently sharp differences between a
hypothetical, back-tested, historical composite performance record and the
actual record that the combination of those underlying elements subsequently
achieved.
Use of Simulated Returns
Back-testing and other statistical analysis material that is provided in
connection with the explanations of the potential returns of the securities
linked to the Index use simulated analysis and hypothetical circumstances to
estimate how it may have performed prior to its actual existence. The results
obtained from such "back-testing" information should not be considered
indicative of the actual results that might be obtained from an investment or
participation in a financial instrument or transaction referencing the Index.
J.P. Morgan provides no assurance or guarantee that the securities linked to
the Index will operate or would have operated in the past in a manner
consistent with these materials. The hypothetical, back-tested, historical
levels presented herein have not been verified by an independent third party,
and such hypothetical, back-tested, historical levels have inherent
limitations. Alternative simulations, techniques, modeling or assumptions might
produce significantly different results and prove to be more appropriate.
Actual results will vary, perhaps materially, from the simulated returns
presented in this free writing prospectus.
IRS Circular 230 Disclosure
We and our affiliates do not provide tax advice. Accordingly, any discussion of
U.S. tax matters contained herein is not intended or written to be used, and
cannot be used, in connection with the promotion, marketing or recommendation
by anyone unaffiliated with J.P. Morgan of any of the matters address herein or
for the purpose of avoiding U.S. tax-related penalties.
Investment suitability must be determined individually for each investor, and
the financial instruments described herein may not be suitable for all
investors. This information is not intended to provide and should not be relied
upon as providing accounting, legal, regulatory or tax advice. Investors should
consult with their own advisors as to these matters.
This material is not a product of J.P. Morgan Research Departments. Structured
Investments may involve a high degree of risk, and may be appropriate
investments only for sophisticated investors who are capable of understanding
and assuming the risks involved. J.P. Morgan and its affiliates may have
positions (long or short), effect transactions or make markets in securities or
financial instruments mentioned herein (or options with respect thereto), or
provide advice or loans to, or participate in the underwriting or restructuring
of the obligations of, issuers mentioned herein. J.P. Morgan is the marketing
name for the Issuer and its subsidiaries and affiliates worldwide. J.P. Morgan
Securities LLC ("JPMS") is a member of FINRA, NYSE, and SIPC. Clients should
contact their salespersons at, and execute transactions through, a J.P. Morgan
entity qualified in their home jurisdiction unless governing law permits
otherwise.
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Important Information (cont'd)
Index Disclaimers
J.P. Morgan Alternative Index Multi-Strategy 5 (USD) is not sponsored,
endorsed, sold or promoted by Standard and Poor's, a division of Standard and
Poor's Financial Services, LLC ("S-P"). S-P does not make any representation or
warranty, express or implied, to the owners of financial products relating to
the J.P. Morgan Alternative Index Multi-Strategy 5 (USD) (the "Products") or
any member of the public regarding the advisability of investing in securities
generally or in the Products particularly or the ability of the S-P Indices to
track general stock market performance. S-P's only relationship to J.P. Morgan
Chase and Co. (the "Licensee") is the licensing of certain trademarks and trade
names of S-P and of the S-P Indices, which indices are determined, composed and
calculated by S-P without regard to the Licensee or the Products. S-P has no
obligation to take the needs of the Licensee or the owners of the Products into
consideration in determining, composing or calculating the S-P Indices. S-P is
not responsible for and has not participated in the determination of the timing
of, prices at, or quantities of the Products to be issued or in the
determination or calculation of the equation by which the Products are to be
converted into cash. S-P has no obligation or liability in connection with the
administration, marketing or trading of the Products.
S-P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S-P INDICES
OR ANY DATA INCLUDED THEREIN AND S-P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S-P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCTS OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S-P INDICES OR ANY DATA INCLUDED THEREIN.
S-P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S-P INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S-P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "Standard and Poor's[R]", "S-P[R]",
"S-P 500 Index" and "Standard and Poor's 500" are trademarks of Standard and Poor's
Financial Services, LLC and have been licensed for use by J.P. Morgan
Securities, LLC
The Nikkei 225 Index is an intellectual property of Nikkei Inc. "Nikkei,"
"Nikkei 225" and "Nikkei Stock Average" are the service marks of Nikkei Inc.
Nikkei Inc. reserves all the rights, including copyright, to the index. Nikkei
Digital Media, Inc., a wholly-owned subsidiary of Nikkei Inc., calculates and
disseminates the Nikkei 225 Index under exclusive agreement with Nikkei Inc.
Nikkei Inc. and Nikkei Digital Media Inc. are collectively referred to as the
"Nikkei 225 Index Sponsor."
The J.P. Morgan Alternative Index Multi-Strategy 5 (USD) is not in any way
sponsored, endorsed or promoted by the Nikkei 225 Index Sponsor. The Nikkei 225
Index Sponsor does not make any warranty or representation whatsoever, express
or implied, either as to the results to be obtained as to the use of the Nikkei
225 Index or the figure as which the Nikkei 225 Index stands at any particular
day or otherwise. The Nikkei 225 Index is compiled and calculated solely by the
Nikkei 225 Index Sponsor. However, the Nikkei 225 Index Sponsor shall not be
liable to any person for any error in the Nikkei 225 Index and the Nikkei 225
Index Sponsor shall not be under any obligation to advise any person of any
error therein.
The Dow Jones EURO STOXX 50 Index is the intellectual property (including
registered trademarks) of Stoxx Limited, Zurich, Switzerland (the "Licensor"),
which is used under license. The J.P. Morgan Alternative Index Multi-Strategy 5
(USD) is in no way sponsored, endorsed, sold or promoted by the Licensor and
the Licensor shall not have any liability with respect thereto.
"Russell 2000[R] Index" is a trademark of Russell Investments ("Russell") and
has been licensed for use by JPMorgan Chase Bank, National Association and its
affiliates. The J.P. Morgan Alternative Index Multi-Strategy 5 (USD) is not
sponsored, endorsed, sold, or promoted by Russell and Russell makes no
representation regarding the advisability of the J.P. Morgan Alternative Index
Multi-Strategy 5 (USD).
The S-P GSCI[TM] and sub-indices are licensed by Standard and Poor's, a division
of The McGraw-Hill Companies, Inc. for use in connection with the J.P. Morgan
Alternative Index Multi-Strategy 5 (USD).
The MSCI indexes are the exclusive property of MSCI Inc. ("MSCI"). MSCI and the
MSCI index names are service mark(s) of MSCI or its affiliates and have been
licensed for use for certain purposes by the Licensee. J.P. Morgan Alternative
Index Multi-Strategy 5 (USD) is not sponsored, endorsed, or promoted by MSCI,
and MSCI bears no liability with respect to the J.P. Morgan Alternative Index
Multi-Strategy 5 (USD).
THE CBOE SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE VIX INDEX FROM SOURCES THAT THE CBOE CONSIDERS RELIABLE, BUT
S-P AND THE CBOE ACCEPT NO RESPONSIBILITY FOR, AND SHALL HAVE NO LIABILITY FOR,
ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S-P AND THE CBOE DO NOT
GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE VIX INDEX OR ANY DATA INCLUDED THEREIN. S-P AND THE CBOE
MAKE NO WARRANTY, EXPRESS OR
IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY ANY PERSON OR ENTITY FROM THE USE
OF THE VIX INDEX OR ANY DATA INCLUDED THEREIN. S-P AND THE CBOE MAKE NO EXPRESS
OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIM ALL CONDITIONS AND WARRANTIES
IMPLIED BY STATUTE, GENERAL LAW OR CUSTOM WITH RESPECT TO THE VIX INDEX OR ANY
DATA INCLUDED THEREIN.
In addition, (i) the CBOE has no relationship to the notes other than
authorizing S-P to grant a license to JPMS and its affiliates to use the VIX
Index as the basis for the notes; (ii) the CBOE has no obligation to take the
needs of JPMS and its affiliates, purchasers or sellers of any notes or any
other persons into consideration in maintaining the VIX Index or modifying the
methodology underlying the VIX Index, and (iii) the CBOE has no obligation or
liability in connection with the administration, marketing or trading of the
VIX Index, any notes or any other investment product of any kind or character
that is based thereon.
"CBOE VOLATILITY INDEX[R]" AND "VIX[R]" ARE TRADEMARKS OF THE CHICAGO BOARD
OPTIONS EXCHANGE, INCORPORATED. THESE MARKS HAVE BEEN LICENSED FOR USE BY J.P.
MORGAN SECURITIES LLC AND SUB-LICENSED FOR USE BY JPMORGAN CHASE and CO. THE
NOTES ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STANDARD and POOR'S OR THE
CBOE AND STANDARD and POOR'S AND THE CBOE MAKE NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN ANY NOTES.
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Overview
Index Description
The J.P. Morgan Alternative Index Multi-Strategy 5 (USD) (the "Index" or "AI
Multi-Strategy 5") provides exposure to a portfolio of absolute return
strategies and aims to generate consistent positive returns with low
correlation to traditional asset classes. The underlying strategies are
selected from three investment styles (Momentum, Carry and Satellite) and cover
several asset classes. Index weights are rebalanced monthly to target a
volatility of up to 5%. The Index is algorithmic, with daily levels published
to Bloomberg. The Index is constructed as an excess return index.
Investment Styles
The underlying strategies represent 3 investment styles:
[] Momentum: Seeks to capitalize on the observed tendency of many markets to
trend either up or down for sustained time periods.
[] Carry: Seeks to capitalize on the value differential between certain assets
and are typically implemented by notionally buying an asset that is on a
relative basis higher yielding (or lower priced) and notionally selling an
asset that is lower yielding (or higher priced).
[] Satellite: Consists of mean reversion and short volatility strategies. Mean
reversion seeks to capitalize on the view that over the short term, markets
are cyclical --meaning that an upward trend is usually followed by a
downward trend and vice versa. Short volatility aims to exploit the
observed tendency of the implied volatility of an equity index to be higher
than the volatility realized by the index.
Asset Classes
The underlying strategies are implemented across four different asset classes:
Equities, Interest Rates, FX and Commodities.
Illustration of Index Design
[GRAPHIC OMITTED]
Index Rebalancing
The underlying strategies are rebalanced on a monthly basis to target a 5%
volatility or less. On each rebalancing date, the index methodology assigns an
equal allocation of risk to the momentum and carry strategies (each with a 45%
allocation) with the remaining 10% allocated to the satellite strategies. These
risk weights are translated to notional weights based on the historical
volatilities of the underlying strategies and the portfolio. Please see the
section entitled "Determining the notional weights" later in this presentation
for further information.
Key Benefits of the Index
[] Robust approach spanning multiple investment styles and asset classes, and
with a volatility target of up to 5%.
[] Hypothetical historical ten year excess returns for the Index of 7.02% p.a.
with a volatility of less than 5%*.
[] Constructed using instruments widely viewed to be liquid.
[] Rules based algorithm with daily index levels published to Bloomberg
(ticker: AIJPM5UE).
The Index is constructed using observable market instruments. The Index is not
a hedge fund and does not track the performance of any hedge fund or group of
hedge funds.
*Source: J.P. Morgan. PAST PERFORMANCE AND BACK-TESTED PERFOMANCE ARE NOT
INDICATIVE OF FUTURE RESULTS. The Alternative Index Multi-Strategy 5 figures
are net of an 80 bps p.a. adjustment factor and other adjustments relating to
rebalancing of notional underlying constituents. Please refer to the
back-testing disclaimer at the beginning of this presentation and the glossary
of defined terms at the end of this presentation.
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Hypothetical Historical Performance
Comparison to hedge fund indices
The hypothetical historical returns of the Index show that the Index would have
outperformed the excess returns of two widely used hedge fund benchmark indices
on both an absolute return and risk-adjusted basis, During the period from
September 2001 to September 2011:
[] The Index outperformed the HFRI Fund Weighted Composite Index (excess
return) by 2.89% p.a. and the CS Tremont Hedge Fund index (excess return)
by 2.79% p.a.
[] The realized volatility of the Index was 4.68% versus 6.36% and 5.60% for
the HFRI Fund Weighted Composite Index (excess return) and the CS Tremont
Hedge Fund Index (excess return), respectively.
Hypothetical historical correlation of AI Multi-Strategy 5 to hedge fund
indices, equities and bonds
The hypothetical historical performance of the Index shows:
[] Low correlations to global equities and bonds.
[] Low correlations to hedge fund indices.
The Index is constructed using observable market instruments. The Index is not
a hedge fund and does not track the performance of any hedge fund or group of
hedge funds.
--------------------------------------------------------------------------------
Hypothetical historical correlations of AI Multi-Strategy Index 5 to equities,
bonds and hedge fund indices, Sep 2001 -- Sep 2011*
--------------------------------------------------------------------------------
HFRI Fund Weighted Composite Index
(excess return) 18%
CS Tremont Hedge Fund Index (excess return) 25%
MSCIWorld (excess returns) 1%
Global Government Bonds (excess return) 34%
Source: J.P. Morgan. PAST PERFORMANCE AND BACK-TESTED PERFOMANCE ARE NOT
INDICATIVE OF FUTURE RESULTS. Correlations are based on monthly returns over
the period from September 2001 to September 2011. Please refer to the
back-testing disclaimer at the beginning of this presentation and the glossary
of defined terms at the end of this presentation.
--------------------------------------------------------------------------------
Hypothetical historical performance (excess return), Sep 2001 -- Sep 2011*
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Source: J.P. Morgan. PAST PERFORMANCE AND BACK-TESTED PERFOMANCE ARE NOT
INDICATIVE OF FUTURE RESULTS. All indices are normalized to a value of 100 at
the start date. Please refer to the back-testing disclaimer at the beginning of
this presentation and the glossary of defined terms at the end of this
presentation.
--------------------------------------------------------------------------------
Hypothetical historical returns and volatilities September 2001 -- September
2011*
--------------------------------------------------------------------------------
Annualized Annualized Sharpe
Excess Volatility Ratio
Return
--------------------------------------------------------------------------------
AI Multi-Strategy 5 7.02% 4.68% 1.50
HFRI Fund Weighted
Composite Index 4.14% 6.36% 0.65
(excess return)
CS Tremont Hedge Fund
4.24% 5.60% 0.76
Index (excess return)
Source: J.P. Morgan. PAST PERFORMANCE AND BACK-TESTED PERFOMANCE ARE NOT
INDICATIVE OF FUTURE RESULTS. Performance statistics are calculated using
monthly return numbers for the period. Please refer to the back-testing
disclaimer at the beginning of this presentation and the glossary of defined
terms at the end of this presentation.
* The AI Multi-Strategy 5 levels are net of an 80 bps p.a. adjustment factor and
other adjustments relating to notional transaction costs. 'HFRI Fund Weighted
Composite Index (excess return)', 'CS / Tremont Hedge Fund (excess return)',
'MSCI World (excess return)' and 'Global Government Bonds (excess return)' refer
to the HFRI Fund Weighted Composite Index reconstructed using monthly returns
from Bloomberg ticker: HFRIFWI Index, the Credit Suisse Tremont Hedge Fund Index
(Bloomberg: HEDGNAV Index), the performance of each of the MSCI World Index
(Bloomberg: GDDUWI Index) and J.P. Morgan Global Government Bond Index
"(Bloomberg: JHDCGBIG Index), respectively, each less 3 month LIBOR.
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Momentum Strategies
Overview
Each momentum strategy employs a simple comparison between a long-term (260
days) average price of the underlying index or market factor and a short-term
(5 days) average price. When the short-term average price moves above the
long-term average (indicating an upward trend), the strategy goes long the
underlying index or market factor and when the short-term average price moves
below the long-term average (indicating a downward trend) the strategy goes
short. The table lists the underlying momentum strategies (a total of fourteen)
together with the asset class represented.
Equity Momentum Strategies
There are three strategies which separately cover the US, European and Japanese
equity markets. Each strategy goes long or short, based on its respective
momentum signal, and tracks the performance of S-P 500 futures contracts, EURO
STOXX 50 futures contracts or Nikkei 225 futures contracts.
Interest Rate Momentum Strategies
There are three strategies which separately cover the US, European and Japanese
money markets. Each strategy goes long or short, based on its respective
momentum signal, and tracks the performance of USD, Euro or Yen interest rate
futures contracts.
FX Momentum Strategies
There are six strategies that cover the currency pairs: EURUSD, USDJPY, EURJPY,
USDCAD, AUDUSD, EURGBP. Each strategy goes long or short FX forwards based on
the momentum signal for the currency pair.
Commodity Momentum Strategies
There are two strategies based separately on the S-P GSCI Energy and S-P GSCI
Non-Energy indices. Each strategy goes long or short the associated index,
based on its respective momentum signal.
Momentum Strategies
[GRAPHIC OMITTED]
* The phrase "J.P. Morgan Alternative Index" precedes the name of each Strategy
and the word "Strategy" follows the name, but for ease of display in the above
table they are not included.
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Carry Strategies
Overview
Carry strategies generally seek to capitalize on the value differential between
assets and are typically implemented by notionally going long an asset that is
on a relative basis higher yielding (or lower priced) and notionally going
short an asset that is lower yielding (or higher priced).
The carry strategies are implemented across Equities, Interest Rates, FX and
Commodities, The table below lists the underlying carry strategies (a total of
eight) together with the associated asset class.
Carry Strategies
[GRAPHIC OMITTED]
*The phrase "J.P. Morgan Alternative Index" precedes the name of each Strategy
and the word "Strategy" follows the name, but for ease of display in the above
table they are not included.
Equity Carry Strategies
There are two strategies which seek to profit from the "value premium" and the
"small cap premium". The Equity Value Carry strategy goes long the MSCI Daily
Value Total Return Gross World Index and short the MSCI Daily Total Return
Gross World Index. The Equity Small Cap strategy goes long an index that tracks
Russell 2000 futures contracts and short an index that tracks S-P 500 futures
contracts.
Bond Carry Strategies
This category is comprised of two types of strategies referred to as Bond Carry
Long strategies and Bond Carry Long-Short strategies.
Each Bond Carry Long strategy entails borrowing at short-term interest rates
and investing the proceeds in two longer dated bonds selected from a universe
of global bonds that have the highest "expected carry". The strategies seek to
capitalize on an upward sloping yield curve, on the basis that if the yield
curve remains unchanged for a period of time the strategy would generate a
return (the "expected carry") from (i) the difference in the interest rate
earned on the long bonds and the short term borrowing rate, and (ii) the
increase in the value of the bond due to the lower yield associated with the
slightly shorter maturity. The Bond Carry Long strategies are implemented
separately for 2Y and 10Y maturities.
Each Bond Carry Long-Short strategy combines a Bond Carry Long strategy with a
position that goes short two longer dated bonds selected from the same global
universe but which have the lowest expected carry.
The Bond Carry Long-Short strategies are implemented separately for 2Y and 10Y
maturities.
The universe of global bonds used are synthetic zero coupon bonds which are
priced using the swap curves for the G-8 countries (USD, EUR, JPY, GBP, CHF,
AUD, CAD, SEK).
FX Carry Strategy
The FX Carry Strategy seeks to borrow money in currencies with low interest
rates and deposit such money in currencies with high interest rates. The
strategy aims to earn the positive interest rate differential between the two
currencies and is exposed to the currency fluctuations between the currencies.
The G-10 currencies (USD, EUR, JPY, GBP, CHF, AUD, CAD, NOK, NZD and SEK) form
the universe of eligible currencies. The strategy goes long the three
currencies (versus the dollar) with the highest short term interest rates and
shorts the three currencies (versus the dollar) with the lowest short term
interest rates.
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Carry Strategies (cont'd)
Commodity Carry Strategy
The Commodity Carry strategy seeks to profit from the shape of various
commodity futures curves by going long a proprietary JPMorgan commodity index
and short the S-P GSCI Excess Return Index. The proprietary JPMorgan commodity
index is composed of the same commodities represented in the S-P GSCI Index but
the futures contracts for each commodity are selected using a methodology which
generally seeks to identify the contract with the highest level of
"backwardation". If there is no futures contract with backwardation, the
methodology will select the futures contract with the lowest level of
"contango". Backwardation (contango) refers to the situation where the futures
contracts for a commodity with a delivery month later in time have lower
(higher) contract prices than futures contracts for the same commodity with a
delivery month closer in time.
Mean Reversion Strategies
Three strategies based separately on the US, European and Japanese equity
markets. Each strategy separately goes long or short an index that tracks S-P
500 futures, EURO STOXX 50 futures or Nikkei 225 futures based on the
performance of the underlying index over the past 5 days.
Please review the relevant product supplement we may file and any relevant term
sheet or pricing supplement for further details on the J.P. Morgan Alternative
Index Multi-Strategy 5 (USD) and the underlying strategies.
Satellite Strategies
Overview
Satellite refers to the Mean Reversion and Short Volatility strategies, which
fall outside the momentum and carry styles.
Mean Reversion strategies seek to capitalize on the view that over short
periods of time, markets are cyclical--meaning that an upward trend is usually
followed by a downward trend and vice versa.
Short Volatility strategies seek to capitalize on the observed tendency of the
implied volatility (i.e., the future volatility expected by the market) of an
equity index to be higher than the realized volatility.
Short Volatility Strategy
The Short Volatility strategy seeks to profit from the observed tendency for
the implied volatility of the S-P 500 index to be higher than the realized
volatility by going short 1 month S-P 500 variance swaps. The variance swap
strikes are determined by reference to the CBOE Volatility Index ("VIX
Index").
Satellite Strategies
Investment Asset Strategy*
Strategy Class
--------------------------------------------------------------------------------
Mean Reversion US Strategy
---------------------------------
Mean Reversion Europe
Strategy
Satellite Equities ---------------------------------
Mean Reversion Japan
Strategy
---------------------------------
Short Volatility Strategy
--------------------------------------------------------------------------------
* The phrase "J.P. Morgan Alternative Index" precedes the name of each Strategy
and the word "Strategy" follows the name, but for ease of display in the above
table they are not included.
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Index Rebalancing
Risk allocation
The Index is constructed to target a 5% volatility or less. The index
methodology allocates portions of this risk ("risk weights") to the strategies.
The momentum and carry strategies are both given a 45% risk weighting with the
remaining 10% allocated to the satellite strategies. The risk weight allocated
to each style is divided across the asset classes represented by that style and
then further divided by the number of strategies within the asset class. The
figure below provides an illustration.
Hypothetical Example -- notional weights
The US Equity Momentum Strategy has a 3.75% risk weight. Suppose the
hypothetical, maximum one year historical volatility of this strategy is 22.76%.
5%
(The preliminary will equal:) 3.75% x ------- = 0.82%
22.76%
Suppose the sum of the preliminary weights for all strategies is 40.75%, and
the hypothetical, historical volatility of the portfolio using these
preliminary weights equals 1.02%.
Scale the preliminary weights up by the lower of
200% 5%
------ or ----- = 4.9019
40.75% 1.02%
The final notional weight of the US Equity Momentum Strategy = 4.9019 x 0.82% =
4.02%
Determining the notional weights
The Index is rebalanced on a monthly basis. The risk capital allocated to each
strategy is translated to a notional weight for that strategy as follows:
[] Each strategy is assigned a preliminary weight equal to its risk weight
multiplied by the target volatility of 5% and divided by its maximum
one-year historical volatility over the past 5 years. For a given risk
weight, the higher the volatility of the strategy, the lower the
preliminary weight.
[] The maximum one-year historical volatility of the portfolio (based on the
preliminary weights) over the past 5 years is measured. The preliminary
weights are scaled up or down based on whether the portfolio volatility is
greater than or less than the target volatility. The sum of all notional
weights is capped at 200%.
Please review the relevant product supplement we may file and any relevant term
sheet or pricing supplement for further details on the how the Index
rebalancing is implemented.
The example is provided for illustration only and is not indicative of future
volatilities or notional weights.
Illustration of the Risk Allocation Process
[GRAPHIC OMITTED]
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Hypothetical Historical Analysis -- Performance Attribution
The chart below shows the annual excess returns for the Index and attribute the
returns to the underlying strategies. There is no guarantee that the future
returns of the strategy be represented by the underlying strategies in this
manner.
--------------------------------------------------------------------------------
Breakdown of hypothetical historical annual returns by strategy Jan 2001 to Dec
2010
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Source: J.P. Morgan. PAST PERFORMANCE AND BACK-TESTED PERFOMANCE ARE NOT
INDICATIVE OF FUTURE RESULTS. The Alternative Index Multi-Strategy 5 figures
are net of an 80 bps p.a. adjustment factor and other adjustments relating to
rebalancing of notional underlying constituents. Annual Excess Returns in the
above chart, for each year, refers to the performance of the relevant strategy
during the calendar year.
Definitions
Annualized Return means for a given index, the compounded return over the
relevant period, expressed on an annualized basis.
Annualized Excess Return means for a given excess return index, the Annualized
Returns of the index.
Annualized Volatility means for a given index, the standard deviation of the
index's daily returns (unless otherwise indicated) scaled for a one-year
period.
Sharpe Ratio is a measure of risk-adjusted performance of a given index and is
calculated as the Annualized Excess Return divided by the Annualized
Volatility.
Correlation for a given pair of indices is a number between -100% and 100%
which measures the degree to which the indices vary together. It is calculated
based on daily returns (unless otherwise indicated) during the specified
period.
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Risk Factors
THE INDEX AND THE STRATEGIES MAY NOT BE SUCCESSFUL AND MAY NOT OUTPERFORM ANY
ALTERNATIVE STRATEGY THAT MIGHT BE EMPLOYED -- The Index follows and is
constructed on twenty-six notional rules-based proprietary strategies that
operate on the basis of pre-determined rules. No assurance can be given that
any investment strategy or combination of investment strategies on which the
Index is based will be successful or that the Index will outperform any
alternative strategy that might be employed.
THE TARGET VOLATILITY OF THE INDEX MAY NOT BE ACHIEVED -- The Index rebalances
monthly by assigning weights to the Strategies that are intended to achieve a
target volatility of up to 5%. However, the actual realized volatility of the
Index may be greater than or less than 5%, which may adversely affect the value
of the Index.
THE REPORTED LEVEL OF THE INDEX AND MOST OF THE STRATEGIES WILL INCLUDE THE
DEDUCTION OF AN ADJUSTMENT FACTOR -- The daily reported levels of the Index and
most of the Strategies include a deduction from the aggregate values of their
respective constituents of an adjustment factor assessed at varying annual
rates. As a result of the deduction of these multiple adjustment factors, the
value of the Index will trail the value of a hypothetical identically
constituted synthetic portfolio from which no such amounts are deducted.
THE INDEX MAY NOT BE A DIVERSIFIED PORTFOLIO -- Diversification is generally
considered to reduce the amount of risk associated with generating returns.
There can be no assurance that the Index, a synthetic portfolio of Strategies,
will be sufficiently diversified at any time.
THE INDEX COMPRISES NOTIONAL ASSETS AND LIABILITIES -- The exposures to the
Strategies and any of their Underlying Constituents are purely notional. There
is no actual portfolio of assets to which any person is entitled or in which
any person has any ownership interest.
THE INVESTMENT STRATEGY USED TO CONSTRUCT THE INDEX INVOLVES MONTHLY
REBALANCING --The Strategies are subject to monthly rebalancing. A synthetic
portfolio that does not rebalance monthly and is not subject to any weighting
caps could see greater compounded gains over time through exposure to a
consistently and rapidly appreciating portfolio consisting of the Strategies.
THE INDEX IS SUBJECT TO THE RISKS ASSOCIATED WITH THE USE OF LEVERAGE -- The
Index and some of the Strategies may use leverage to increase the return from
any Strategy or Underlying Constituent, as applicable. The total weight of the
Strategies in the Index is 200%. It is possible, though unlikely, for the
weight of a single Strategy to be close to 200%. The use of leverage will
magnify any negative performance of the Strategies or Underlying Constituents,
as applicable. In addition, some of the Underlying Constituents are composed of
highly leveraged instruments, such as futures contracts. The use of these
futures contracts as components of these Underlying Constituents may
potentially result in higher volatility than in the absence of their usage.
SOME OF THE STRATEGIES INCLUDE OR PERMIT NOTIONAL SHORT POSITIONS -- Some of
the Strategies include or permit notional short positions in their Underlying
Constituents, which are subject to unlimited risk of loss because there is no
limit on the amount by which the price that the relevant asset may appreciate
before the short position is closed. It is possible that any notional short
position included in any such Strategy may appreciate substantially with an
adverse impact on the value of such Strategy and the Index.
THERE ARE RISKS ASSOCIATED WITH A MOMENTUM INVESTMENT STRATEGY -- Each momentum
strategy employs a mathematical model that seeks to capitalize on positive and
negative trends in the price of assets on the assumption that if an asset
performs well or poorly, it will continue to perform well or poorly in the
future. Consequently, a momentum investing strategy may perform poorly in
non-trending markets characterized by short term volatility.
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Risk Factors
THERE ARE RISKS ASSOCIATED WITH A CARRY INVESTMENT STRATEGY -- Each carry
strategy employs an investment strategy that broadly seeks to capitalize on the
observed value differential between an asset that is on a relative basis lower
priced or higher yielding and an asset that on a relative basis is higher
priced or lower yielding. However, if the underlying assets move against the
direction expected by the strategy, the strategy may perform poorly.
THERE ARE RISKS ASSOCIATED WITH A MEAN REVERSION INVESTMENT STRATEGY -- Each
mean reversion strategy seeks to capitalize on the view that over short periods
of time, markets are cyclical --meaning that an upward trend in the level of an
Underlying Constituent is usually followed by a downward trend or vice versa.
However, any sustained decline (or increase) in the level of the relevant index
at a time when the mean reversion theory would suggest that the index level
should increase (or decline, as applicable) may result in unexpected losses,
which could be significant.
THERE ARE RISKS ASSOCIATED WITH THE SHORT VOLATILITY STRATEGY -- The short
volatility strategy seeks to capitalize from the long-term trend of the
observed volatility of a broad market equity index, such as the S-P 500[R]
Index, tending to be less than the volatility implied by prices in the equity
options market, as represented by the VIX Index. However, we cannot guarantee
that the implied volatility will always be greater than the realized
volatility, and the value of the short volatility strategy will decrease if the
implied volatility is less than the realized volatility.
OTHER KEY RISKS:
Changes in the value of the Strategies may offset each other.
Correlation of performances among the Strategies may adversely impact the value
of the Index.
Changes in legal and regulatory regimes affecting commodity futures contracts
underlying the commodity strategies could adversely affect our ability to hedge
our obligations under any securities linked to the Index that we may issue or
your investment in any such securities. Under these circumstances, we may
adjust the payment on such securities in a way that may be detrimental to you.
The Index is subject to risks associated non-U.S. securities.
The Index is subject to currency exchange risk.
The Index is subject to interest rate risk.
The Index is subject to foreign currency risk.
The Index and the Strategies have a limited operating history.
J.P. Morgan Securities Ltd., one of our affiliates, is the sponsor and
calculation agent of the Index, the Strategies and most of the Underlying
Constituents and may have interests that are different from or adverse to those
of holders of any securities linked to the Index.
Any securities linked to the Index that we may issue are exposed to the credit
risk of JPMorgan Chase and Co. The risks identified above are not exhaustive. You
should also review carefully the related "Risk Factors" section in any relevant
product supplement that we may file and the "Selected Risk Considerations" in
any relevant term sheet or pricing supplement that we may file.
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