SECTION NAME

ISSUE 2 24 FEBRUARY, 2009

In This Issue
Founding Father Q&A
Tim Wong, Chief Executive of Man Groups AHL, talks about how the firm continues to improve its trading approach...........................3

News Briefs

Why Did People Shun Managed Futures?

A veteran investor I know used to talk about how he controlled the risk in the fund of hedge funds he managed. He invested in as many as 100 hedge funds at a time, across a wide range of strategies and styles. Managed futures was not among those. It was possibly the only hedge fund sector he avoided on principle. Were talking about a seasoned pro. After several decades of experience, he had developed his own diversification tactics and analytical devices. The latter gave advance warning of rising correlation among strategies so that the allocations could be changed to keep the portfolio diversified and losses at a minimumor so his robust track record suggested. The credit crisis was not kind to my friend. While fund of funds generally lost less than 20% in 2008, the loss in one of his pools was more than double that. Part of the reason was that the portfolio was levered, which magnified the losses made by the underlying funds. Another reason emerged last month. He had a long-standing allocation to Bernard Madoff. It was not a big part of his fund, but still large enough to add a significant amount of red ink. Heres a knowledgeable person who gave money to Madoff, about whom there were doubts for many years, but avoided managed futures as too risky. What is it about managed futures that turns off investors? Does it carry special risks not found in other strategies? How do longtime managers control the risks? This issue explores those questions. AHL, part of Man Group, is one of the largest and longest-running futures trading programs. Tim Wong, chief executive of AHL, tells us how they keep improving the system. Jon Knudsen of Tapestry Asset Management presents the investors point of view, explaining whats attractive about managed futures, whats not and what to watch for when investing. Cont. on page 2

Managed Futures Share of Industry Assets ........................5

Insider Talk

Seasoned hedge fund investor Jon Knudsen, co-chief investment officer of Tapestry, discusses what he looks for in CTAs ....................7

Futures Lab

Learn about ways to control the risks associated with managed futures .........................................9

Manager Profiles

Up-and-coming managers comment on their strategy and the markets. ..............................12

Regulators & Courts

Futures-related fraud cases continue to pile up .....................14

Top Ten

The most recent ranking from Autumn Gold .............................15

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OPALESQUE FUTURES

ISSUE 2 24 FEBRUARY, 2009

EDITORIAL

Notwithstanding the complexities of investing in the strategy, managed futures assets have grown rapidly in the past 10 years and especially after 2002, as the graph below shows. Last year the hedge fund industry as a whole shrank substantially due to a combination of heavy losses and redemptions. By contrast, managed futures had doubledigit gains and assets were flat.

Since other hedge funds contracted while managed futures remained stable, the latter now account for a significantly larger share of the industry. For details, see News Briefs. To say that were living in difficult and uncertain economic times is an understatement. Under these conditions an accurate appreciation of the risks and benefits of managed futures may be more important than ever for successful investing. We hope this issue contributes to a realistic view. Chidem Kurdas Editor kurdas@opalesque.com

Source: Barclay Hedge

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ISSUE 2 24 FEBRUARY, 2009

FOUNDING FATHER Q&A

Research as Strategy Mainstay

Tim Wong, chief executive of AHL, provides insight into the performance of managed futures. He began his career doing statistical research in financial markets with AHL after finishing an engineering degree at Oxford University. He has developed systematic trading models at AHL for over 18 years, during which time he contributed to AHL becoming one of the worlds largest and most successful managed futures managers, currently with $24.4 billion under management. AHL, part of Man Group, returned over 30% in its flagship Diversified program in 2008. Mr. Wong sees AHLs research ethic and commitment to research as the key driver behind its success. This has resulted in Man Group, along with AHL, establishing a collaborative relationship with Oxford University through the creation of the Oxford-Man Institute of Quantitative Finance. AHL has a research laboratory located on the same premises as the Institute, with high performance computing and micro-structure modeling among the areas being researched. It is planned that this laboratory within Oxford University will play a key part in driving AHLs research efforts in 2009 and beyond.
Opalesque Futures Intelligence: How did you move into futures from engineering? Tim Wong: I stumbled into managed futures quite by chance. My main interests have always been the sciences, and I originally wanted to become an engineer after I completed my degree. Having been brought up in Hong Kong I was mildly aware of the financial markets, but I never aimed to be the investment banker type. After I graduated I applied for a few financial positions alongside a number of engineering opportunities. I was lucky to have found AHL, which allowed me to combine my love of science with the study of the financial markets. OFI: Whats interesting about this market? TW: Futures markets are often viewed as more complicated and risky than stock or bond markets. In my view, this is more due to the misuse of the inherent leverage of futures through margining and the unfamiliarity with managing short positions. Futures allow investors to express their bullish or bearish views of markets simply by going long or short, respectively. In addition, trading is carried out on a regulated exchange, which provides price transparency, centralized clearing and liquidity. Unlike equities or bonds there are no dividends or coupons, which is perfect for trading strategies based on forecasting market directions across a diverse pool of markets. OFI: Why did AHL do so well in 2008, a very difficult year for almost all other investments? TW: If you look at the performance of our Diversified fund in 2008, what you see is that all sectors traded contributed positively to performance. Energies were the stand-out performer, with long and then short oil positions later in the year driving returns. Currency trading was also extremely profitable, with long US dollar

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ISSUE 2 24 FEBRUARY, 2009

FOUNDING FATHER Q&A

positions adding to performance in the final quarter. While on face value this sounds good, it must be acknowledged that 2008 was an extremely challenging year for the financial markets. We saw volatility increase substantially throughout the course of the year, while at the same time counterparty exposure became a key focal point. Our robust and adaptive risk management systems, diverse trading relationships and advanced electronic trading platform ensured that we were able to successfully navigate our way through the challenging year that was 2008. OFI: Which markets offer promising trading opportunities this year? TW: From my experience, one important thing that I have learnt is that it is difficult to predict which markets are going to perform over the next year, let alone over the following few months. If you look back at sector attribution of our Diversified program over the past five years, what you see is that markets and sectors do not perform consistently over time. For example, energy trading led performance in 2008 however in 2006 it actually generated a loss. By taking a highly diversified approach, by both sector and market, you have the potential to profit from trends developing in only a handful of markets. Concentrating on the year ahead, economic uncertainty will continue to have a dominant impact on market performance, just like in 2008. Based on our past experience, we are confident that, given clear trends, AHL will continue to perform well. However, given the current high volatility environment, it must be emphasized that risk management will continue to play an important role in AHLs day-to-day operations. OFI: Whats the main advantage of managed futures over other investments? TW: 2008 really highlighted the benefits of managed futures, especially as a complement to traditional investments or even other hedge fund strategies. With global equity markets falling 40% over the last calendar year, managed futures really proved that they can provide absolute returns with little or even negative correlation with the broader markets. This was not unique to the current credit crisis and history shows that managed futures have achieved this during other difficult equity market environments. The highly diversified nature of managed futures portfolios is one of the primary factors explaining how managed futures have been able to deliver uncorrelated returns over time. For example, currencies, bonds, interest rates, stocks, metals and agricultural markets are all normally traded within a highly diversified managed futures portfolio. Trading futures has a number of advantages, especially in the current uncertain climate. Their use allows managed futures managers to take advantage of both rising and falling markets, enabling managers to be flexible and react quickly to price moves. Another important feature is that futures are traded on highly regulated exchanges that offer transparent pricing and centralized clearing, which mitigates counterparty risk. Margining also results in managed futures being very cash efficient and therefore liquid, an extremely important characteristic given the illiquidity problems that other hedge fund styles are currently experiencing. OFI: Whats the main risk? How can it be reduced? TW: For trend-followers, range-bound price activity or short-term reversals are market conditions that can have a negative impact on performance. While this can happen over the short term, over the longer term a decrease in power of the inefficiency exploited can pose a greater risk to managed futures managers. Since we began trading in 1987, AHL has continually researched and refined its trading systems in order to enhance its systematic trading approach and therefore counter these and other risks. Our emphasis on research and development, in particular the establishment of the Man Research Laboratory in Oxford, puts us in an even stronger position to manage these risks both now and in the future.

Since we began trading in 1987, AHL has continually researched and refined its trading systems in order to enhance its systematic trading approach

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ISSUE 2 24 FEBRUARY, 2009

NEWS BRIEFS
Managed Futures Gain Asset Share
Managed futures assets were flat last year while hedge fund industry assets were decimated by redemptions and trading losses. The latest data from Barclay Hedge has commodity trading advisor assets at $206 billion at the end of 2008, about the same as in 2007. Meanwhile, total hedge fund assets shrank from $1.9 trillion in May 2008 to $1.1 trillion in December, according to Barclay Hedge. That means managed futures assets are at 19% of hedge fund assets. In 2002, by contrast, the ratio was close to 6%. The managed futures sector may get an even larger percentage share of the shrinking asset pie, but how much additional money that would bring is unclear. With managed futures the top-performing strategy after short selling in 2008, many CTAs hope to gain assets in 2009. Investors continued to redeem heavily from hedge funds in January, according to press reports. Because databases contain different groups of managers and use different criteria in extrapolating industry assets, the numbers vary across data sources. For instance, HedgeFund. net estimated that hedge fund assets fell to $1.84 trillion in December, down from a peak of $2.97 trillion in the second quarter of 2008. This estimate is larger than the Barclay number due to the application of different criteria, among other reasons. Despite the disparity in the numbers, the growing size of managed futures relative to the rest of the industry shows up in different databases. The exact percentage varies, however.

CTAs Slip in January, Discretionary Beats Systematic

Managed futures ended a successful run in 2008 with a loss in January, while other hedge fund styles recovered. Depending on the database you consult, the CTA January loss varied from 0.1% to 0.56%. But Managed Futures Europe posted a gain, while the larger Barclay database shows that discretionary traders made money during the month (Table below).

January Returns, Various Indexes

Barclay CTA Index Barclay Discretionary Traders Barclay Systematic Traders Managed Futures Europe EDHEC CTA Global Greenwich Futures Credit Suisse/ Tremont Managed Futures

(-)0.13% 1.28% (-)0.36% 0.48%. (-)0.29 (-)0.1 (-)0.56%

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ISSUE 2 24 FEBRUARY, 2009

NEWS BRIEFS
Global Advisors Eases Redemption Terms
Global Advisors LP, a specialist commodity hedge fund manager located in London and Jersey, agreed to remove all gating provisions contained in the terms and conditions of its Global Commodity Systematic Fund. Daniel Masters, who co-founded Global Advisors in 1999 with Russell Newton, says GCS is a highly liquid program that trades the largest of the exchange-listed physical commodity futures contracts. In the current investment climate we are passing on our underlying liquidity to investors in our fund, he says. This action is in response to demands from investors globally, that we feel are justified, that hedge fund managers should always be able to meet redemption requests. The Global Commodity Systematic program has returned a compound annualized rate of 19% since its inception in 2005. In the past year or so many funds used gates to delay withdrawals by investors, often arguing that this was necessary to avoid selling the funds assets at extremely low prices under crisis conditions .

Traders Plan to Increase Option Use

US options industry commissions totaled an estimated $2.6 billion as increased volume and participation by asset managers drove brokerage commissions to new records in 2008, according to a study by TABB Group. Trading volumes are expected to decline 17% in 2009 but rise again in 2010. Andy Nybo, senior analyst at Tabb and author of the study, says the future looks bright because nearly 70% of the traders interviewed expect to increase their use of options as normalcy returns to the marketplace and they deploy strategies suspended amidst 2008s market volatility. He found that despite the growth in the options market, traders leading complaint continues to be liquidity, which favors bulge-bracket dealers delivering a full suite of services. Traders are willing to use the phone if they can get a better price by talking with a dealer, but for tight markets with sufficient size, electronic trading will provide the biggest bang for the buck especially when commissions are factored into the equation. TABB Group interviewed 54 traders at asset managers, hedge funds, market makers and proprietary trading firms with combined assets under management of $4.9 trillion, trading an average 15.7 million contracts monthly.

CME Introduces Forex E-Micros

CME Group plans launch a series of smaller-sized foreign exchange contracts, called Forex E-Micros, in the first quarter of this year. The new contracts will be one-tenth the size of the corresponding regular CME FX contracts, making them cost-effective for individual traders or smaller Commodity Trading Advisers. Derek Sammann, head of FX Products at CME, says that individual traders looking to participate in the global FX market or small businesses seeking a cost-effective hedging tool for their FX risk can choose Forex E-micro futures as a versatile and accessible new instrument to manage their exposure.

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ISSUE 2 24 FEBRUARY, 2009

INSIDER TALK

What Do Investors Look For?

We have a seasoned investor to tell us what characteristics of managed future attract/ deter investors. Jon Knudsen has been allocating money to hedge funds for around 20 years and has indepth experience with futures. Among the positions he held at Goldman Sachs was portfolio manager of the Goldman Sachs Tactical Trading Fund, a multi-advisor macro and futures fund. He started his career in futures as a runner for a Chicago commodity house, muscling his way into the trading pit. Currently he is co-chief investment officer of Tapestry Asset Management LP, where he helps design and manage portfolios for institutional investors.
Opalesque Futures Intelligence: Whats the advantage of investing in futures markets? Jon Knudsen: The three huge advantages to futures are the liquidity, the ease of marking positions and minimizing your credit risk by using clearing houses. OFI: Whats the biggest risk? JK: Probably the most immediate danger to an investor is a manager violating agreedupon limits on positions and losses because he is unable or unwilling to get out of a position. The risk is not catching this soon enough to mitigate most of the loss. OFI: How do you get around that? JK: You minimize the chance of something like that by staying in touch with the clearing houses and knowing the manager well. We track our managers positions and compare their returns to what we expect them to be on the basis of market movements. If theres a discrepancy between what we expect and whats being produced, thats a cause for investigation. Also, you diversify the portfolio so as to get away from single manager risk. OFI: Whats the basics for allocating to managed futures? JK: Broadly, you make the most returns with trend followers but you have to decide how much volatility you want to take. There are enough managers with different return streams that you can construct a diversified portfolio. OFI: How would you diversify among CTAs? JK: CTAs are becoming more specialized. You might get one that specializes in financials, another that primarily trades agricultural commodities. There are very long term trend followers and others who have a short time horizon. Some put on trades lasting only hours or even minutes. These have different returns from most trend followers. Others put on relative value trades, taking advantage of seasonal

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ISSUE 2 24 FEBRUARY, 2009

INSIDER TALK
changes or other variations in markets. Much like you blend stocks in an equity portfolio, here you have long-term, short-term and relative value traders. OFI: Is there anything specific about doing due diligence on CTAs versus other hedge funds? JK: With a systematic CTA, you need to look at how the system was constructed and the idea behind it. Equity managers tend to tell you exactly what they do and the metrics they use, but may not want to show their positions. Its the opposite with CTAstheyll give you the details of their positions but might talk only vaguely about how the signals are generated! OFI: How do you get a handle on those signals? OFI: Why do some funds of funds not invest in managed futures?

JK: If you look at the past few years, until relatively recently managed futures returns were by and large not as attractive as returns from other hedge fund strategies like long/short equity. A second barrier is that CTA and macro returns tend to be lumpyyou can have a period of substantial returns followed by a period of flat or negative returns. By comparison arbitrage strategies were yielding consistent returns. If people just followed the numbers and did not look ahead, they saw no reason to invest in managed futures. A third factor is some CTA returns are very volatilebut not all of them are, and recently we saw how volatile other strategies can be. OFI: What would you advise a would-be investor?

JK: It helps to have both some technical analysisstatistical background and trading experience in order to understand whether a CTA really has insight into how markets function. Some people can construct models but do not really understand markets. You have to see whether they have market knowledge to match their modeling skills. OFI: Dont investors complain that CTAs rely on unfathomable black boxes? JK: Investors fail to understand the systematic managers, largely because the CTAs themselves make the process too opaque. Many managed futures strategies are simple, though applied in a very precise way.

JK: While its a good idea to analyze the numbers using quantitative methods, you need a lot of qualitative work to see where the returns came from and what one can expect in different market conditions.

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ISSUE 2 24 FEBRUARY, 2009

FUTURES LAB

Risks and Controls

We present a review of certain risks associated with managed futures and ways of monitoring and controlling these risks. This discussion summarizes part of a longer and more detailed study by Man Investments, an arm of Man Group. The terms managed futures and commodity trading advisors are used interchangeably.
Managed futures have historically provided excellent diversification, strong returns and good downside protection. As with all investments, however, there is the possibility of loss. A future or forward contract is a derivative instrument, the value of which depends on the value of an underlying asset. Trading in futures is a speculative activity and futures prices can be highly volatile. Market prices are difficult to predict and are influenced by many factors, including changes in interest rates, weather conditions, government interventions and political and economic events. trends. The introduction of electronic trading allowed managed futures managers to execute their trades efficiently and, when needed, generally reduce their positions quickly, thus making shorter-term and smaller-scale opportunities accessible. It thereby expanded the investable universe for the investment approach. This combination of market growth, persistent trends and ongoing research means that there is still substantial room for development in the managed futures industry. However, as strategies become more sophisticated and the race to develop new techniques and trade infrastructure heats up, the gap between the most developed trading managers and the following pack may widen further. The wide range of possible returns is indicative of CTA managers high volatility targets. Compared to other hedge fund styles, managed futures have the highest return potential but also high volatility and downside deviation. They have lower Sharpe and Sortino ratios than other hedge fund styles, reflecting their greater volatility. However, as managed futures typically have a low correlation to other hedge fund styles, the strategy tends to enhance the overall Sharpe and Sortino ratios of a diversified fund of hedge funds portfolio. Investors might note that Sharpe and Sortino ratios are not the only statistical measures one should look at. As managed futures are not normally distributed, these statistical figures may not correctly capture the complete risk/return profile of this style. Hence higher moments such as skewness should also be taken into account. An important point to keep in mind is that the distribution of managed futures returns is positively skewed. This is an attractive feature of trend-following CTA programs.

Leverage
Futures and forwards are traded on margin meaning that only a small deposit is required to take a position. Depending on the volatility of a commodity, margins can vary between 0.05% and 5% of the notional value of the commodity. One can therefore achieve 100% investment exposure with just a fraction of the capital required through the inherent leverage of futures contracts. This frees up capital, which can be invested elsewhere or used to adjust the leverage of ones portfolio to match the clients risk appetite. Because margin requirements are low, there is inherently a high degree of leverage, which will increase returns but will also magnify losses. A relatively small movement in the price of a futures contract may result in immediate and substantial loss or gain to a fund holding a position in such contract. A fund may also invest in forward contracts, options, swaps and over-the-counter derivative instruments, among others. Like other leveraged investments, trading in these securities may result in losses in excess of the amount invested. There is also the risk that counterparties will be unable to fulfill their obligations, whether due to insolvency, bankruptcy or other causes, which could result in losses. If a Futures Commission Merchant retained by a manager were to become bankrupt, it is possible that the fund

Variations and Volatility

The managed futures style is generally characterized by wide variations in returns. We see this in the monthly distribution of the Stark 300 Trader Index, compiled using the top 300 trading programs from Starks database of CTA programs. For the period January 1994 to November 30, 2008, the monthly distribution of returns for this index ranged from (-)6.39% to 8.16%. That does not capture the entire range of possible returns that are typical for a single CTA manager. When we applied Monte Carlo modeling, we found a probability distribution showing expected annual returns ranging from around (-)30% to over 50%. Moreover, variation across managers may grow. Managed futures managers continuously research new technologies and trading approaches in order to identify and profit from these trends. The scientific approach to managed futures trading has spawned a wide variety of different trading strategies, which today allow certain traders to capture even small

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OPALESQUE FUTURES

ISSUE 2 24 FEBRUARY, 2009

FUTURES LAB
would be able to recover none or only part of its assets held by that FCM. different techniques to analyze the vast quantities of data available. The zero-sum game of futures trading forces all participants to continuously research the behavior of their peers and to adapt their strategy in an effort to stay ahead in the pursuit of excess returns. In many respects research and risk management go hand in glove, as new trading ideas will often require new or additional risk monitoring tools. Of course, there is no guarantee that a managers risk controls will be successful.

10 Understanding the Strategy

Some people call managed futures black box trading. A black box is an input/output device such as a transistor. Many users are not familiar with the logic inside a black box. The term black box suggests that investors cannot understand CTA trade strategies. This criticism is misleading. CTAs are characterized by rule-based investment strategies. Trading strategies are hard coded and often programmed into computer algorithms. To prevent their proprietary ideas from being stolen, managers are typically reluctant to divulge the exact composition of their trading models. However, while a managed futures manager will not be asked to reveal the exact programming for his trades when being screened by a fund of hedge funds manager, it is crucial that the developer understands and explains the trading strategy and the associated risks. Investors can have comfort in evaluating past performance only when the manager adheres to a predefined strategy and explains that strategy to investors. Compared to managed futures, most traditional equity portfolio advisors such as mutual funds make their investment decisions from a changing mix of fundamentals, news and technical data. To this end, their cause and effect may be much more unpredictable than systematic CTA models, which are not based on ad hoc trading decisions. Thus the systematic approach, if properly explained and adhered to, gives investors a better basis for estimating future returns and risk.

Risk Measures
Risk management is crucial and increasingly more complicated, requiring a significant portion of a managers time. To mitigate the dangers CTAs apply risk controls and mostly trade with counterparties on risk-averse financial exchanges. At the end of the day a CTAs infrastructure is key. Only managers that stay at the forefront of new research and trading ideas will be able to cope with the challenges of monitoring and limiting risk. Todays trading systems are complex and rely on

Diversified Trading
The increasing liquidity of new instruments and markets such as credit derivatives, emerging markets, exchange-traded funds and swaps has generated many more trading opportunities for CTA managers, emphasizing the importance of strong research capabilities. In order to detect new trading opportunities CTAs must constantly develop their systems. Exposures across a wide range of sectors may help to smooth returns, as individual sectors often tend to exhibit different behavioral characteristics. The factors affecting the world commodity markets, for example, differ from those influencing financial futures. While in both cases long-term trends are usually driven by economic growth and stability, short- or mediumterm movements in commodity markets are sensitive to seasonal effects as well as sudden changes in supply or demand that result from environmental or political factors. Hence there is a high degree of uncertainty in commodities markets and futures trading allows investors to reap gains (or experience losses) from the sometimes fervent upward and downward price movements that result from the uncertainty. Geographical diversification can help reduce risk. The significant growth in the number and diversity of futures markets in recent years has facilitated a broadly diversified approach across regions and asset classes. This approach aims to control risk by avoiding over-concentration within particular sectors and markets. (See next page.)

The major risk monitoring measures and focus areas are:

Stress testing - measures current market positions against historical price data. This allows the CTA to see how his current position sizes would have performed historically, especially during periods of market stress. Implied volatility - is a forwardlooking measure of potential risk that is analyzed for each market Leverage - if levels approach certain multiples of prevailing net asset value, a review is triggered. Margin-to-equity ratios if initial margin requirements relative to prevailing net asset value reach pre-defined levels, a review is undertaken that may result in a reduction in positions. Net exposures to sectors and different currencies. Value-at-Risk (VaR) - measures the expected maximum loss from an investment portfolio when futures markets conditions are similar to those in the model. The value is determined for a specific time interval and certain level of confidence.

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OPALESQUE FUTURES

ISSUE 2 24 FEBRUARY, 2009

FUTURES LAB
Top 30 Derivatives Exchanges Ranked by Number of Contracts Traded and/or Cleared
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 CME Group Korea Exchange Eurex Chicago Board Options Exchange Liffe International Securities Exchange BM&F Bovespa Philadelphia Stock Exchange National Stock Exchange of India JSE (South Africa) NYSE Arca Options Dalian Commodity Exchange Russian Trading System Stock Exchange IntercontinentalExchange American Stock Exchange Zhengzhou Commodity Exchange Boston Options Exchange Osaka Securities Exchange Moscow Interbank Currency Exchange OMX Group Taiwan Futures Exchange London Metal Exchange Shanghai Futures Exchange Hong Kong Exchanges & Clearing Australian Securities Exchange Tel-Aviv Stock Exchange Multi Commodity Exchange of India Mercado Espaol de Futuros Financieros Mexican Derivatives Exchange Tokyo Financial Exchange Jan-Oct 2008 2,901,709,573 2,343,607,538 1,907,749,030 1,033,816,153 915,891,375 883,864,868 642,499,555 472,640,506 467,212,144 409,534,082 368,630,879 258,453,517 208,858,253 201,193,121 181,632,092 168,556,419 152,666,603 138,099,321 128,008,861 124,575,959 114,452,854 94,713,908 94,442,774 89,384,940 83,840,354 78,334,573 75,373,290 68,089,896 62,282,005 59,400,463

11

Change from 2007 9.91% (-)2.03% 18.50% 33.40% 14.63% 35.66% (-)8.80% 45.52% 48.75% 64.58% 42.39% 95.85% 93.83% 22.18% (-)9.60% 144.66% 47.27% 58.69% 74.48% 3.18% 19.66% 23.05% 44.90% 24.92% (-)13.01% (-)8.53% 32.49% 75.31% (-)69.38% (-)9.86%
Source: Futures Industry Association

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ISSUE 2 24 FEBRUARY, 2009

MANAGER PROFILES
Up-and-coming managers with diverse approaches describe their strategy and what they see happening in the markets. Their comments have been edited.

12

David Mousseau of Lone Wolf Investments LLC

David was the head trader for a subsidiary of Northern Indiana Public Service Corporation, where he was responsible for the risk-management of existing physical electricity positions and proprietary trading. He has worked for various other energy businesses.

2008 return for Carbon Emissions Instrument Program: 15%

Comments: Our proprietary model was designed to systematically trade the European Union Carbon allowance emissions futures market in Europe. The carbon emission markets are quite new but offer the opportunity for tremendous growth. This model is designed to capture the movements that energy products generally display. The program trades both the current years emission vintage and the next years emission vintage. The contracts call for physical delivery/receipt of emission credits but all positions will be liquidated prior to the month of delivery.

Gabriel Pellegrini of Global Edge Capital Management

Based in Sao Paolo, Brazil, Gabriel has worked at Bolsa de Mercadorias & Futuros after an earlier career as a teachers assistant.

2008 return: 23%

Comments: Our investment approach is diversified among 13 strategies simultaneously to generate both short-term and long-term gains. The strategy further diversifies across different trading time frames ranging from four to 90 days. We trade more than 100 futures contracts on agricultural products, metals, energies, currencies, interest rates and stock indices on US, European, Asian, African and Australia exchanges. January was a good month for our short term strategies, which showed profits in both stock indexes and currencies. The volatility in equities markets around the world contributed to the months performance, however we experienced some losses in the fixed-income sector where the rise in interest rates negatively impacted sector returns.

Tim Pickering of Auspice Capital Advisors

Before founding Auspice, Tim was Vice President of Options Trading at Shell Trading Gas and Power in both Houston and Calgary. Prior to that, he traded for TD Securities in Toronto in a wide range of instruments including foreign exchange, bonds, money markets and exotic derivatives. In addition to Auspice he currently manages an exchange-traded fund for Claymore.

2008 return in Diversified Commodity Fund: 44%

Comments: The portfolio is diversified across global commodity and financial futures and invests only in liquid exchange traded futures contracts. Auspice derives its edge in the markets from a deep understanding of the correlations and volatility of the individual assets and sectors. The flat return in January illustrates the funds ability to be a store of value in periods of continued equity weakness.

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ISSUE 2 24 FEBRUARY, 2009

MANAGER PROFILES

13

Douglas Bry of Northfield Trading LP

In his early career, Doug was a trial attorney. In 1987 he and Philip Spertus formed Technical Trading Strategies Inc. to apply computer technology to the creation of quantitative models for trading global futures markets and in 1989 they formed Northfield.

2008 return for Diversified Program: 14.3%

Comments: Northfield is a 100% systematic Commodity Trading Advisor that evolved from a software firm. The Diversified Program is an absolute return strategy that seeks to profit from both up and down price movements in the global financial and commodity markets. Designed specifically not to be trend dependent, the Program trades a diversified portfolio of up to 50 of the most liquid and transparent global markets, with a primary focus on stock indexes, interest rates, currencies and energy markets. 2008 was a tumultuous year for most asset classes and investments. However, through this difficult period, Commodity Trading Advisors handled the risk and volatility well. After posting a 24% return in 2007, the Northfield Trading Diversified Program continued to perform well in 2008 and is up 46% over the past 36 months ended December 2008.

Charlie & Jes Santalauria of Parrot Trading Partners LLC

Jes is an experienced real estate developer who along with his son Charlie manages several portfolios employing their unique Calendar Condor hybrid options and futures strategy. Charlie recently spoke at a hedge fund incubation conference held at the Harvard Club of New York. Both Jes and Charlie were featured emerging money managers at the MFA Chicago conference the year before last.

2008 return: 11%

Comments: We are in a trading environment that has never been seen before. Markets have become numb to grim economic reports. The US economy has lost approximately 1.5 million jobs over the past three months and another 2 million since the recession began in Dec. 2007 (3.5 million total). We expect the economic data to surprise both on the upside (sparking rallies) and downside in coming months. Our strategy for the upcoming months will be to add positions throughout each move and to take profits accordingly. We will be more conservative than we have been in the past, but expect that we can generate returns similar to those in past years relative to the S&P 500.

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ISSUE 2 24 FEBRUARY, 2009

REGULATORS & COURTS

14

Futures Ponzi Schemes Continue to Emerge

It looks like there is an epidemic of futures-related scams, with new ones coming to light every week. But the large number of incidents may be a result of regulators becoming more aggressive in investigating and taking action. Since the last issue of OFI two weeks ago, the US Commodity Futures Trading Commission announced the following enforcement actions: A federal court froze the assets of an Illinois Commodity Pool Operator run from Toronto, Canada. CFTC charged that Brookshire Raw Materials Management LLC and its Canadian managers John M. Marshall and Stephen Z. Adams took more than $4.6 million in a Ponzi Scheme from September 2006 to December 2008. They were supposed to invest client proceeds in a portfolio of commodity futures and forward contracts designed to replicate the investment methodology of corresponding indexes developed by another Brookshire firm. According to the CFTC, in December 2008 Messrs. Marshall and Adams closed their offices, destroyed company data stored on computer servers and failed to acknowledge redemption requests. The Ontario Securities Commission worked with the CFTC on the case. Regulators are seeking further penalties. CFTC charged Hawaii-based Marvin Cooper and Billion Coupons Inc. with defrauding deaf people in a $4.4 million foreign currency scheme. Mr. Cooper allegedly attracted customers with promises of 15% to 25% monthly returns from foreign exchange trading. He lured 125 deaf Americans and Japanese, using his own deafness to relate to them. The CFTC says he spent more than $1.4 million of client money for such items as flying lessons and a $1 million home and used $1.6 million to pay out fake profits as well as commissions. A court froze his and the firms assets and appointed a temporary receiver. CFTC sought to freeze the assets of Mark Trimble of Edmond, Oklahoma, and his company, Phidippides Capital Management LLC, for deceiving some 60 investors in the Phidippides hedge fund. Mr. Trimble allegedly operated the $34 million fund from 2005 on and since at least October 2007 issued false account statements to cover up multi-million trading losses while paying redeemers from other investors money. In addition, he is charged with taking over $1 million in management fees based on false reports of profits. Stephen Obie, acting director of the CFTC enforcement division, says The CFTC continues to zealously prosecute these lecherous schemes, so that as many assets can be preserved as possible as we fulfill our vital mission to protect customers from fraud and abuse. Frank Anthony DeSantis III of Florida was sentenced to 108 months in prison and over $2 million in tax penalties for wire fraud and conspiracy to defraud the Internal Revenue Service while operating and having a stake in several commodity investment and telemarketing schemes in Southern Florida. He misrepresented material facts to potential customers in order to convince them to invest in foreign currency options and deliberately failed to tell customers that more than 95% of customers lost money and that he was previously barred by the CFTC from acting as a commodities broker. CFTC ordered a former employee of the Bank of America to pay a $360,000 penalty for false trading reports he submitted to the bank, in addition to a restitution of the $12 million loss he caused. Michael Moster, currently of New York, was a proprietary trader for the Bank of America in January 2004, when he falsely reported that he purchased 4,000 Treasury futures contracts. This concealed the risk associated with large unauthorized positions in Treasury bonds that he had established, by making it appear as if the long futures position hedged the Treasury bond risk. By the following week, the fictitious trades inflated the value of his trading book by over $12 million. The sale of the unauthorized Treasury bond position caused a loss of $12.2 million. In the criminal case against him, he is required to compensate the bank for the loss.

On a separate matter, the CFTC seeks public comment on a proposal to change the requirements for Acknowledgment Letters. These are letters that a futures commission merchant or derivatives clearing organization must obtain from any depositor holding segregated customer funds or funds of foreign futures or foreign options customers. The proposal can be obtained from the website www.cftc.gov and those interested can submit their comments via email to secretary@ cftc.gov. All comments are to be posted on the website.

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OPALESQUE FUTURES

ISSUE 2 24 FEBRUARY, 2009

TOP TEN

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We will feature top managers from a different database every month.

The list below comes from Autumn Gold, a commodity trading advisor information service founded by Kim Avery. This is one of several types of rankings available from the service. Ms. Avery has been involved in the futures industry since 1977. She has worked for E.F. Hutton, Merrill Lynch, Balfour Maclaine Futures, Price Group and Futures Asset Management. From 1992 through 1998 she was European marketing consultant to Renaissance Technologies in marketing the Medallion Fund to European investors.

Autumn Gold January 2009 Top Ten Funds

Program Company Last Monthly Return 24.7% 18.4% 13.1% 10.6% 10.3% 10.2 10% 9.9% 9.2% 8.4% 12-Month Return (-)60% 80% (-)30% 55% 136% (-)14% 33% (-)4% (-)19% 62%

Silver Conservative Aggressive Growth Ultra S&P (Proprietary Trading) Stairs Program VCM-Global Futures 2X Trading Edge Standard Growth FX Global Yield Option Selling Strategy Diversified Futures Program

Pearlman CTA Madgroup Invs. Paragon Capital Mgt. White Indian Trading Co. Vision Capital Mgt. Stein Inv. Mgt. Madgroup Invs. Waypoint Capital Mgt. Financial Comm. Invs. Marchese Capital Mgt.

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PUBLISHER Matthias Knab - knab@opalesque.com EDITOR Chidem Kurdas - kurdas@opalesque.com ADVERTISING DIRECTOR Denice Galicia - dgalicia@opalesque.com EDITORIAL ADVISOR Tim Merryman - tmerryman@opalesque.com CONTRIBUTORS Bucky Isaacson, Frank Pusateri, Pavel Topol, Ty Andros, Walt Gallwas.

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Copyright 2009 Opalesque Ltd. All Rights Reserved.