*Rev. Date November 7, 2019*

#### General

#### What is a factor forecast?

A factor forecast reflects a view on the return for factors that is intended to be realized over a long investment horizon, such as 3+ years. As explained further below, you can either create custom forecasts using your Capital Market Assumptions or use the historical geometric return forecasts provided by Venn.

**What is the forecast volatility?**

Venn calculates the annualized volatility using each factor’s returns over its full return history.

#### Where are forecasts used in Venn?

Forecasts are used throughout Venn. In particular, forecasts are a key input into Optimization[1] and the forecast metrics displayed in the Performance Summary section of various analyses.

#### How do forecasts affect Optimization?

Forecasts are fundamental to Optimization. Custom forecasts that reflect your future performance views on factors can help generate optimization results that are aligned with your organization’s views, while incorporating your specified objectives and constraints.

#### Default Forecasts

#### What are the Historical default forecasts?

Venn provides default return forecasts for each factor. The default forecasts are the geometric average calculated using the full period of historical returns available on Venn for each factor. These values tend to be relatively consistent over the long term.

Venn also provides a default return value for the risk-free rate using the average 3 month sovereign benchmark yield in the investor’s home currency over the last month.

#### Are the Historical default forecasts Two Sigma’s views of the future?

No. Importantly, the default forecasts do not represent Two Sigma’s views of the future. Rather, they are intended to provide a potential starting point for users to formulate their own forecasts.

#### How often are the Historical default forecasts populated?

Historical default forecasts are continuously updated with the latest available returns.

#### Creating Custom Forecasts

#### How can I change the forecasts to something other than the Historical forecasts?

You can create your own factor return forecasts by navigating to the Factor Forecasts modal and entering your organization's Capital Market Assumptions for major asset classes. Select from various indices and assign arithmetic annualized expected return values to each. Venn will then translate these views into forecasts for the factors in the Two Sigma Factor Lens. For best results, Venn suggests entering Capital Market Assumptions for at least 3 indices.

**How can I access the Factor Forecasts modal?**

The Factor Forecasts modal is accessible from the Performance Summary section of various analyses and from Optimization.

**How does Venn translate my Capital Market Assumptions into factor return forecasts?**

Venn first determines each of your selected index’s factor exposures over the past 3 years as well as their annualized residual return. Venn then computes the expected annualized factor returns by minimizing the difference between:

- The annualized expected returns you specified for each index - and -
- The specific index residual returns plus the sum of the factor exposures

Here’s an illustrative example: say you had a return expectation of 10% for Global Equity markets, as proxied by the MSCI World index. Venn determines that the MSCI World index has one statistically significant factor exposure of +0.9 to the Equity factor with a residual term of 1%. Venn will then seek to minimize the difference between 10% and 1% + (0.9*x), where x is the expected factor return for Equity based on your return expectation.

#### Will my Capital Market Assumptions translate to return forecasts for all of the factors in the Two Sigma Factor Lens?

Given the indices currently available in the Forecasts modal, your Capital Market Assumptions will not translate to all of the factors in the Two Sigma Factor Lens. To translate to a broad array of factor return forecasts, you will need to provide Capital Market Assumptions for a variety of indices that have statistically significant exposures to different factors, but it would be impossible to do so for each and every factor. In the illustrative example above, inputting a Capital Market Assumption for only Global Equity will likely not provide insight into your organization’s views on factors such as Local Inflation or Quality. Venn will use the Historical forecasts for factors that are not covered by your Capital Market Assumptions.

#### Do my Capital Market Assumptions impact forecast volatility?

No, your Capital Market Assumptions are used for return forecasts only. Other calculations, such as forecast volatility, will be based on the default Historical factor forecasts provided by Venn.

#### How do I save my forecasts?

After inputting your Capital Market Assumptions in the Factor Forecasts modal, you will be prompted to press “Translate & Create New” in order to convert them into factor forecasts. The next view will highlight in purple which factors in the Two Sigma Factor Lens were updated. The factors that weren’t covered by your Capital Market Assumptions will default to the Historical factor forecasts provided by Venn. Pressing “Done” will save this set of forecasts.

Please note that updates to forecasts will impact other users in your organization.

#### Will I be notified if someone at my organization changes the forecasts?

You will not be notified if someone changes your organization’s forecasts, but can view your previously saved Forecasts and switch back if applicable.

[1]* *Please note, this feature is only available in certain jurisdictions.

*This document highlights certain aspects of this analytic. As an overview, it does not discuss all material facts or assumptions. Please see **Important Disclosure and Disclaimer Information**.*