arrow funds relative strength

Long/Short Sector Relative Strengthg/ g

Financial professional use only. Do not distribute to the public.

Distributed by Aquarius Fund Distributors, LLC - Member NASD, SPIC

Agenda

On today’s call we will discuss:

•Long/Short Sector Relative Strength:• Beyond Relative Returns• Absolute Return Focus Absolute Return Focus • Creating Absolute Return Strategies

•Performance Review•Performance Review

-Arrow DWA Balanced FundJohn Lewis, Portfolio ManagerJohn Lewis, Portfolio Manager

-Arrow Alternative Solutions FundBill Flaig, Portfolio Manager

Financial professional use only. Do not distribute to the public.2

•Q&A

Investor Behavior

Euphoria

Excitement

Optimism

Anxiety

Optimism

Desperation Hope

Panic


Return Factors

Absolute ReturnsRelative Returns VS Absolute ReturnsSeeks to achieve positive returns without regard to

Relative ReturnsSeeks to achieve

returns that are better

VS

returns without regard to a benchmark

returns that are better than a benchmark

The measure of success is relative only to the

A negative return is considered good if it is

investment objective“less negative” than the benchmark


Sector Relative Strength

1999 2000 2001 2002 2003 2004 2005 2006 2007Consumer DiscretionConsumer

Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecom Services

Utilities

Sector Rotation 33.3% 20.5% (13.2%) (12.3%) 26.9% 14.2% 15.3% 15.5% 16.9%

S&P 500 21.0% (9.1%) (11.9%) (22.1%) 28.7% 10.9% 4.9% 15.8% 5.5%


Outperformed Underperformed

Source: Morningstar, December 2007Past performance is not indicative of future returns.

Investor Behavior

Many investors attempt to time the market


by buying and selling at the wrong time.

6

Relative Return: Sector Rotation

Bear Market(Apr 2000-Mar 2003)

Bull Market(Apr 2003-Mar 2006)

Consumer Discretion (13 8%) 15 0%Consumer Discretion (13.8%) 15.0%Consumer Staples 5.7% 10.7%

Energy (3.2%) 33.0%Financials (3 3%) 19 0%Financials (3.3%) 19.0%

Health Care (0.3%) 7.6%Industrials (10.9%) 21.6%

Information Technology (37.8%) 16.8%gy (37.8%) 16.8%Materials (4.5%) 23.7%

Telecom Services (32.5%) 17.4%Utilities (11.6%) 23.2%( )

Sector Rotation (7.4%) 23.4%

S&P 500 (16.1%) 17.2%


Outperformed Underperformed

Source: Morningstar, December 2007Past performance is not indicative of future returns.

Return Factors

Absolute ReturnsRelative Returns VS Absolute ReturnsSeeks to achieve positive returns without regard to

Relative ReturnsSeeks to achieve

returns that are better

VS

returns without regard to a benchmark

returns that are better than a benchmark

The measure of success is relative only to the

A negative return is considered good if it is

investment objective“less negative” than the benchmark


Create Absolute Return Opportunities

Simultaneous L/S Strategies provides potential


Simultaneous L/S Strategies provides potential opportunities in both stages of the cycle

9

What Are Absolute Return Factors?

Equities Fixed Income Futures

Long/Short Value High Yield Credit SpreadsLong/Short Commodity Sector

Relative Strength

Long/Short Growth Asset Backed Credit SpreadsLong/Short Financial Futures

Relative Strength

Long/Short Relative Strength Corporate Credit SpreadsLong/Short Currency Relative

Strength

Long/Short Capitalization Emerging Market Credit Spreads Currency Yield Arbitrage

Long/Short Sector Relative Strength

Term Spreads

Long/Short Mean Reversion

Merger Arbitrage

Volatility Arbitrage


What Are Absolute Return Factors?

Equities Fixed Income Futures

Long/Short Value High Yield Credit SpreadsLong/Short Commodity Sector

Relative Strength

Long/Short Growth Asset Backed Credit SpreadsLong/Short Financial Futures

Relative Strength

Long/Short Relative Strength Corporate Credit SpreadsLong/Short Currency Relative

Strength

Long/Short Capitalization Emerging Market Credit Spreads Currency Yield Arbitrage


Term Spreads

Long/Short Mean Reversion


Merger Arbitrage

Volatility Arbitrage


Research Point: Relative Strength

Financial professional use only. Do not distribute to the public.Source: Arrow Funds, December 2007Past performance is not indicative of future returns.

12

Segmenting Relative Strength

18%

Relative Strength Performance Quartiles: August 1927 to December 2007

12%

14%

16%

6%

8%

10%

2%

4%

6%

0%

Q1 Q2 Q3 Q4 Mkt


13

Absolute Return Structures

150%

250%

200%

MarketNeutral

Gross Exposure

Long ExposureQ1

100%

50% AssetsNet Exposure

0%

Short ExposureQ4

‐50%

‐100%

Long & Gross Exposure

200%

250%

150%

100%Long &Short

Long ExposureQ1

Short Exposure

AssetsNet Exposure

50%

50%

100%

0%


pQ4

‐100%

‐50%

14

Research Point: Risk Adjusted Benefit

18%Relative Strength Performance Quartiles: August 1927 to December 2007

12%

14%

16%

4%

6%

8%

10%

0%

2%

4%

Q1 Q2 Q3 Q4 RF Mkt M/N L/S

15.3% 10.9% 9.3% 7.0% 3.7% 10.2% 10.3% 16.6%18.7% 18.9% 20.3% 21.3% 0.9% 19.2% 13.6% 17.7%91.1% 94.6% 94.5% 93.1% ‐1.8% 100.0% ‐20.5% 32.6%Correlation

ReturnRisk


15

Research Point: Consistent Preservation

Bear Market Bull Market 6‐Yr Range

Apr 2000 ‐ Mar 2003

Apr 2003 ‐ Mar 2006

Apr 2000 ‐ Mar 2006

S&P 500 ‐16.1% 17.2% ‐0.8%Sector Rotation ‐6.3% 19.0% 5.6%Market Neutral 8.2% ‐1.6% 3.2%Long/Short 2.8% 6.3% 4.5%

Bear Market Bull Market 6‐Yr RangeOct 1971 ‐ Sep 1974

Oct 1974 ‐ Sep 1977

Oct 1971 ‐ Sep 1977

S&P 500 ‐10.6% 20.0% 3.6%Sector Rotation 8 7% 28 0% 8 1%Sector Rotation ‐8.7% 28.0% 8.1%Market Neutral 12.4% 15.9% 14.1%Long/Short 4.5% 28.0% 15.7%

Bear Market Bull Market 6‐Yr RangeJul 1929 ‐ Jun 1932

Jul 1932 ‐ Jun 1935

Jul 1929 ‐ Jun 1935

S&P 500 ‐42.4% 39.3% ‐10.4%Sector Rotation ‐32.2% 37.0% ‐3.6%Market Neutral 32.4% ‐14.3% 6.6%


Market Neutral 32.4% 14.3% 6.6%Long/Short 11.1% 4.5% 7.7%

Source: Arrow Funds, December 2007Past performance is not indicative of future returns.

16

Research Point: Consistent Compounding

1 Year 3 Years 5 Years 10 Years 20 Years 30 Years 40 Years 50 Years 60 YearsS&P 500 5.5% 8.6% 12.8% 5.9% 11.8% 13.0% 10.5% 11.0% 11.9%Sector Rotation 13.3% 15.4% 15.1% 13.7% 17.6% 18.3% 15.2% 16.3% 16.6%Market Ne tral 17 7% 14 6% 3 2% 10 6% 11 6% 12 0% 11 4% 11 5% 11 3%


Market Neutral 17.7% 14.6% 3.2% 10.6% 11.6% 12.0% 11.4% 11.5% 11.3%Long/Short 22.4% 20.5% 9.1% 15.7% 18.2% 18.1% 16.1% 17.1% 17.3%

Source: Arrow Funds, December 2007Past performance is not indicative of future returns.

17

Research Point: Diversification Benefit

As of

Strategic Portfolio

Strategicw Sector Rotation

Strategicw Market Neutral

Strategicw Long Short

Return Risk Return Risk Return Risk Return Risk1 Year 6.08% 5.86% 7.51% 6.69% 8.35% 4.65% 9.25% 5.78%

3 Years 7.01% 4.99% 8.68% 5.99% 8.57% 4.14% 9.72% 5.39%

As ofDec 2007

5 Years 9.43% 5.72% 10.58% 6.45% 8.35% 4.42% 9.55% 5.54% 10 Years 6.20% 9.01% 7.76% 10.03% 7.26% 7.35% 8.30% 9.05% 20 Years 10.33% 9.35% 11.81% 10.32% 10.76% 7.78% 12.08% 9.38%30 Years 11.41% 10.85% 12.84% 12.15% 11.68% 9.27% 12.94% 11.17%

Sector Market Long

30 Years 11.41% 10.85% 12.84% 12.15% 11.68% 9.27% 12.94% 11.17% 40 Years 9.68% 11.00% 10.84% 12.23% 10.21% 9.23% 11.14% 11.11% 50 Years 9.42% 10.39% 10.86% 11.61% 10.01% 8.71% 11.11% 10.52%

Equities48%

Bonds32%

Sector Rotation

20%

Equities60%

Bonds40% Equities

48%Bonds

32%

Market Neutral

20%

Equities48%

Bonds32%

Long Short20%


18

Creating Absolute Return Strategies

1. Identify a Universe 2 Segment the Universe2. Segment the Universe3. Construct a Portfolio of Top & Bottom Tiers

• Market Neutral• Absolute Return Strategy

Tools to Segment Sector UniverseTools to Segment

• Technical Research

F d l R h

Sector Universe

• Stocks

h ( )• Fundamental Research

• Quantitative Research

• I-shares (DJ Sector ETFs)

• ProShares (DJ Sector ETFs)


Arrow DWA Balanced FundTactical Approach for Broad Market Exposure

Performance ReviewJohn Lewis, Portfolio Managerg


DWA Balanced Fund: Performance

Performance displayed represents past performance which is no guarantee of future results The maximum sales charge for A-shares is

Financial professional use only. Do not distribute to the public.Source: Morningstar and Arrow Funds December 2007

Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A shares is5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares held lessthan 30 days. The Funds Annual Operating expense is 2.01%

21

DWA Balanced Fund: HoldingsAs of 12/31/2007


DWA Balanced Fund: Strategy Breakout

Q4 2007 Style Sector International Fixed Income Alternative Arrow DWA Rotation Rotation Rotation Rotation Rotation Balanced Fund

Strategy 0.94% 1.54% ‐0.36% 3.85% 9.88% 2.94%

S&P 1500 S&P 500 MSCI EAFE LB AGG S&P GSCI Fund BenchmarkBenchmark ‐3.38% ‐3.33% ‐1.70% 3.00% 11.64% ‐0.90%

2007 Style Rotation

Sector Rotation

International Rotation

Fixed Income Rotation

Alternative Rotation

Arrow DWA Balanced Fund

Strategy 7.33% 16.90% 30.55% 6.59% 15.91% 15.29%

S&P 1500 S&P 500 MSCI EAFE LB AGG S&P GSCI Fund BenchmarkBenchmark 5.47% 5.49% 11.63% 6.96% 32.67% 6.08%

Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-shares is5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares held lessthan 30 days. The Funds Annual Operating expense is 2.01%


Source: Morningstar and Arrow Funds December 2007

23

Arrow DWA Balanced FundSeeks Absolute Returns With Targeted Risk

Performance ReviewBill Flaig, Portfolio Manager


Alternative Solutions Fund: Holdings (12/31/07)


Source: Arrow Funds December 2007

25

Fund Performance

Arrow Alternative Solutions FundAverage Annual Total Returns

As of 12/31/07

CLASS 1-MonthSince

Inception(10/31/07)

A Shares 2.1% 2.3%

AdvisorShares 2.3% 2.3%

Fund Benchmark 0.32% -0.68%

Cat: Long/Short -0.13% -1.35%

Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-sharesis 5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares heldless than 30 days. The Funds Annual Operating expense is 1.52%

The Fund benchmark is blend of three Credit Suisse/Tremont Hedge Fund Indices: 33.3% Long Short Equity, 33.3% FixedIncome Arbitrage and 33.3% Managed Futures Indices. The Credit Suisse/ Tremont Hedge Fund Indices are the asset-weighted benchmarks of hedge fund performance. It is not possible to invest in indexes which are unmanaged and do not


g g p p gincur fees and charges.

Disclosure

An investor should consider the Fund’s investment objective, risks, charges, and expenses carefullybefore investing or sending money. This and other information about Arrow Funds is contained in thefund’s prospectus, which can be obtained by calling 1-877-277-6933. Please read the prospectus carefullyb f i ti Th A i di t ib t d b A i F d Di t ib t LLC b FINRA/SIPC

The Arrow DWA Balanced Fund may invest in commodity related securities which may be subject to greater volatility thaninvestments in traditional securities. The Fund may invest in international and emerging market securities which may besubject to special to risks including fluctuations in currency government regulation differences in accounting standards and

before investing. The Arrow is distributed by Aquarius Fund Distributors, LLC member FINRA/SIPC.0211-AFD-2/27/2008

subject to special to risks including fluctuations in currency, government regulation, differences in accounting standards andliquidity. The Fund may invest in small-cap securities which may have special risks associated including wider variations inearnings and business prospects than larger, more established companies. The Fund may invest in real estate relatedsecurities which may be subject to mortgage-related risks and real estate market fluctuations. The Fund may invest in fixedincome securities which are subject to risks including interest rate, credit and inflation risk. The Fund is non-diversified asthere are a limited number of underlying funds available and each holding has the potential for a greater impact on theFund’s return. However, the underlying funds have access to a large number of different investments providing theadditional diversification benefits discussed in the presentation. The Arrow Alternative Solutions Fund may not besuitable for all investors. The fund’s use of derivatives such as futures, options and swap agreements may expose the fundto additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives. Investingin leveraged instruments will magnify any gains or losses on those instruments. Investing in commodity and currency

l t d iti b bj t t t l tilit th i t t i t diti l iti Th f d' f h trelated securities may be subject to greater volatility than investments in traditional securities. The fund's use of shortselling involves increased risks and additional costs. Investing in small-cap securities, may have special risks associatedincluding wider variations in earnings and business prospects than larger, more established companies. The Fund mayinvest in fixed income securities, which are subject to risks including interest rate, credit and inflation.

The maximum sales charge for Arrow’s A shares is 5 75% A share investors may be eligible for a reduction in sales


The maximum sales charge for Arrow s A-shares is 5.75%. A-share investors may be eligible for a reduction in salescharges. The Fund charges a fee of 1.00% on redemptions of shares held less than 30 days. The Arrow DWA BalancedFund’s annual operating expense is 2.01%. The Arrow Alternative Solutions Fund’s annual operating expense is 1.54%.

Arrow Contact Information

Steve TopleyMid-AtlanticMid Atlantic(215) 348-1529

Day ThomasySouth Midwest(210) 695-8542

Gary GarciaMountain(303) 329-2679 ( )

All other territories…

Jake Griffith, Director of SalesJohn LabadiniInternal Sales


Jake Griffith, Director of Sales(301) 260-0163

Internal Sales (617) 259-1633

28

Fund Performance

Arrow DWA Balanced FundAverage Annual Total Returns

As of 12/31/07

CLASS 1-Month 3-Month 1-Year

Since Inception(8/7/06)

A Sh 1 19% 2 94% 15 29% 17 72%

As of 12/31/07

A Shares 1.19% 2.94% 15.29% 17.72%

AdvisorShares 1.04% 2.74% 14.28% 16.77%

Fund Benchmark -0.30% -0.90% 6.08% 10.55%Benchmark

Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-sharesis 5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares heldless than 30 days. The Funds Annual Operating expense is 2.01%y p g p

The Fund benchmark is a blend of two indices: 60% S&P 500 and 40% Lehman Aggregate Bond Index. The LehmanBrothers U.S. Aggregate Bond Index is an unmanaged index composed of investment-grade securities from the LehmanBrother Government/ Credit Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index. The S&PIndex is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common


p y g , gstock prices. It is not possible to invest in indexes which are unmanaged and do not incur fees and charges.

Fund Performance

Arrow Alternative Solutions FundAverage Annual Total Returns

As of 12/31/07

CLASS 1-MonthSince

Inception(10/31/07)

A Shares 2 1% 2 3%

As of 12/31/07

A Shares 2.1% 2.3%

AdvisorShares 2.3% 2.3%

Fund Benchmark 0.32% -0.68%Benchmark

Cat: Long/Short -0.13% -1.35%

Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-sharesis 5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares heldless than 30 days. The Funds Annual Operating expense is 1.52%

The Fund benchmark is blend of three Credit Suisse/Tremont Hedge Fund Indices: 33.3% Long Short Equity, 33.3% FixedIncome Arbitrage and 33.3% Managed Futures Indices. The Credit Suisse/ Tremont Hedge Fund Indices are the asset-weighted benchmarks of hedge fund performance. It is not possible to invest in indexes which are unmanaged and do not


g g p p gincur fees and charges.

arrow funds relative strength

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