for internal use only the resource group annual meeting for continuing education for cfp®, pace and...

For Internal Use Only

The Resource Group Annual Meeting

For Continuing Education for CFP®, PACE and CPE use. Broker/dealer use only. Not to be used with the public.

Lincoln Financial Network is the marketing name for Lincoln Financial Services Corporation and Lincoln Financial Advisors Corp., affiliates of Lincoln Financial Group. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. CRN200903-2027248

Understanding Managed FuturesA Former Institutional Investor's Perspective On Managed Futures

Thomas J. O’Donnell, IIIFirst Vice PresidentNewedge USA, LLC

Alternative Investments GroupPh. 312.762.1136

[email protected]


Academic Resources

1983 Professor John K. Litner of Harvard University "The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,”

Professor Litner wrote: “The improvements from holding an efficiently-selected portfolio of managed accounts or funds are so large, and the correlation between returns on the futures portfolios and those on the stock and bond portfolios are so low (sometimes even negative), that the return/risk tradeoffs provided by augmented portfolios…clearly dominate the tradeoffs available from portfolio of stocks alone or from a portfolios of stocks and bonds."

1991Everett, McLaren, and O’Donnell“Virginia Retirement System Managed Futures White Paper”

1999Thomas Schneeweis, Professor of Finance CISDM/SOM, University of Massachusetts“The Benefits of Managed Futures”

2000Mark S. Rzepczynski“Market Vision and Managed Futures: Convergent Versus Divergent Trading Styles”


Academic Resources

2002Harry M. Kat, Professor of Risk Management, Cass Business School, City University, London“Managed Futures and Hedge Funds: A Match Made in Heaven”

2002Gildo Lungarella“Managed Futures: A Real Alternative”

2004Steve Koomar“managed futures can save your tail”

2006Kip Thompson “A Case for Managed Futures - Portfolio Diversification Opportunities”

2006Gildo Lungarella“The Case for Managed Futures - Trading advisors are an attractive source of diversification”


Commodity Trading Advisors (CTAs) Are Unique

97.3% of Magellan’s return can be explained by traditional assets.

Only 4.8% of this CTA’s return can be explained by traditional assets.

ASSET ALLOCATION: MANAGEMENT STYLE AND PERFORMANCE MEASUREMENT

An Asset class factor model can help make order out of chaos

William F. Sharpe*

Reprinted from the Journal of Portfolio Management, Winter 1992, pp. 7-19.

Virginia Retirement System, Managed Futures White Paper

John McLaren

Nancy C. Everett, CFA

Thomas J. O’Donnell, III


Estimated Growth of Assets Managed Futures Industry and Hedge Fund Industry

1990 – 2008

$11 $15 $19 $26 $25 $23 $24 $33 $36 $41 $38 $41 $51$87

$132 $131$170

$205 $207

$39 $58$96

$168 $167 $186

$257

$368 $375

$456$491

$539

$626

$820

$973

$1,105

$1,427

$1,868

$1,407

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$ B

illio

ns

Managed Futures (BarclayHedge) Hedge Fund Industry (HFR)

Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.com.

Source: Barclay Hedge Ltd., www.barclayhedge.com


Number of Programs in Barclay CTA Index

1980 – 2008

16 19 22 2332 38

4762

93

131143

164

197

230

268

308321 316

327 319

345

317326

359

386396

439428

491

0

50

100

150

200

250

300

350

400

450

500

550

To qualify for inclusion in the Barclay CTA Index, an advisor must have four years of prior performance history. Additional programs introduced by qualified advisors are not added to the Index until after their second year. These restrictions, which offset the high turnover rates of trading advisors as well as their artificially high short-term performance records, ensure the accuracy and reliability of the Barclay CTA Index.



Importance of Asset Allocation

The 1986 paper titled, “Determinants of Portfolio Performance,” by Brinson, Hood, and Beebower concluded that a portfolio’s asset allocation (i.e. the weightings assigned to the asset classes) is the primary determinant of portfolio return variability, with security selection and market timing

playing minor roles.

Equities

Fixed Income

Real Estate

Cash

%

%

%

%

This decision is most important. Examples of other Asset Allocation decisions:

Which asset classes? Active and passive? International mandates? Global mandates? Emerging market mandates? Currency hedging? Equity market capitalization mandates? Liquid vs. illiquid investments? Hedge Funds/Alternative Investments? Benchmarks? Rebalancing? Return objective: Relative or Absolute?


Managed Futures Represents a Significant Portion of Hedge Fund Industry AUM(Est. Asset in $MM)

HFR data %Strategy Sub-Strategy 12/ 31/ 2008 of Total

1. Equity Hedge Fundamental Value 281,837$ 18.9%2. Relative Value Multi-Strat 230,858$ 15.5%3. Managed Futures CTA * 207,000$ 13.9%4. Event Driven Special Situations 198,335$ 13.3%5. Macro Discretionary Thematic 155,408$ 10.4%6. Event Driven Distressed/Restructuring 82,383$ 5.5%7. Equity Hedge Fundamental Growth 59,929$ 4.0%8. Relative Value FI-Corporate 57,226$ 3.8%9. Event Driven Activist 32,268$ 2.2%

10. Equity Hedge Equity Market Neutral 28,889$ 1.9%11. Equity Hedge Energy/Basic Materials 27,161$ 1.8%12. Equity Hedge Quantitative Directional 24,931$ 1.7%13. Relative Value FI-Asset Backed 23,153$ 1.6%14. Relative Value FI-Convertible Arb 22,197$ 1.5%15. Equity Hedge Technology/Healthcare 21,957$ 1.5%16. Event Driven Merger Arbitrage 15,246$ 1.0%17. Equity Hedge Short Bias 5,777$ 0.4%18. Relative Value Volatility 5,601$ 0.4%19. Event Driven Private Issue/Reg D 3,685$ 0.2%20. Relative Value Yield Alternatives 3,532$ 0.2%21. Event Driven Credit Arb 2,476$ 0.2%22. Event Driven Multi-Strat 692$ 0.0%23. Equity Hedge Multi-Strat 300$ 0.0%

TOTAL 1,490,841$ 100.0%

* Source: BarclayHedge

Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.com



Which Hedge Funds Offer Asset Class Diversification?

Hedge Fund Asset Class Exposure

Equities

Convertible ArbitrageDistressed SecuritiesEquity HedgeEquity Market NeutralEquity Non-HedgeEvent-DrivenMacro Managed FuturesRelative Value Arbitrage

Fixed Income

Convertible ArbitrageDistressed SecuritiesEvent-DrivenFixed Income: ArbitrageFixed Income: Mortgage-BackedMacro Managed FuturesRelative Value Arbitrage

CurrenciesMacro Managed Futures

CommoditiesMacro Managed Futures


My Suggestion: Investment Objectives for “Traditional” Hedge Funds versus Managed Futures

Investment Objectives For “Traditional” Hedge Funds

Should fulfill the following three investment objectives:

(1) Improve your source of Active Equity or Active Fixed Income management;

(2) Achieve satisfactory risk adjusted returns relative to other Equity or Fixed Income investments; and

(3) To the extent that the managers implementing these strategies have theability to short, then some level of diversification is possible.

Investment Objectives For Managed Futures Program

Should fulfill the following three investment objectives:

(1) Diversification of the total portfolio;

(2) Achieve satisfactory returns in both rising and falling markets; and

(3) Returns should be achieved at a reasonable level of risk.

%

%

%

%

Equities

Fixed Income

AlternativeInvestment

s

Equities

Fixed Income

AlternativeInvestment

s


Global Futures Markets

Energy

Crude Oil

Gas Oil

Heating Oil

Natural Gas

Unleaded Gas

Stock Indices

DAX (Germany)

DJ Euro Stoxx 50 (Europe)

Hang Seng (Hong Kong)

MSCI EAFE (Europe)

NASDAQ 100 (USA)

Nikkei (Japan)S&P 500 (USA)

Metals

Aluminum

CopperGoldSilver

Nickel

Zinc

Interest Rates

JGB (Japan)

Notional

(France)

Treasury Bonds &

Notes (USA)

Bank Accepted

Bill (Australia

)Euribor

(Europe)Bankers Acceptance (Canada)

Currencies

Australian Dollar

British Pound

Canadian Dollar

Euro

Japanese Yen

Mexican Peso

New Zealand Dollar

South African Rand

Swiss Franc

US Dollar

Agricultural Commodities

SoybeansSoymeal

CornWheat

Cotton

CocoaCoffee

Sugar


Traditional Markets vs. Non-Traditional Markets

QUIZ

Investing in a globally diversified portfolio of stocks, bonds, currencies, and commodities enables CTAs and Global Macro managers to participate, both long and short, in a variety of non-correlated market trends.

This quiz was designed to highlight the fact that markets move in two directions, and to dispel the myth that the appearance of a traditional market trend (e.g. stocks and bonds) is uniquely different from a non-traditional market trend (e.g. currencies and commodities). See if you can tell the difference.


10

30

50

70

90

110

130

150

May-02 May-03 May-04 May-05 May-06 May-07 May-08

600

800

1000

1200

1400

1600

1800


100

102

104

106

108

110

112

114

116

118

120


250

350

450

550

650

750

850

950

1050


0

20

40

60

80

100

120

140

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-0760

70

80

90

100

110

120


0.4

0.5

0.6

0.7

0.8

0.9

1


150

350

550

750

950

1150

1350

1550

1750


0

10

20

30

40

50

60

70

80

90

100

Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04


10

30

50

70

90

110

130

150


0

20

40

60

80

100

120

140

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07250

350

450

550

650

750

850

950

1050


Interest Rate – 5 Yr US T-Note

Stock - Enron

Stock - Yahoo Currency – US Dollar

Equity Market – S&P500

Currency – Australian Dollar Commodity - Soybeans

Commodity – Gold

Commodity – Crude Oil

600

800

1000

1200

1400

1600

1800


102

104

106

108

110

112

114

116

118

120


60

70

80

90

100

110

120


0.4

0.5

0.6

0.7

0.8

0.9

1

May-02 May-03 May-04 May-05 May-06 May-07 May-08 150

350

550

750

950

1150

1350

1550

1750


10

20

30

40

50

60

70

80

90

100

Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04

Source of price data: Bloomberg



14

Past performance is not necessarily indicative of future results.

Range of Best Performing to Worst Performing CTAs and L/S Equity Managers


Professional money managers who manage the assets of their clients using derivative instruments (futures, forward contracts, and options) are known as Commodity Trading Advisors (CTAs). As an asset category in the alternative investment industry, they are classified as Managed Futures.

1. Trading Approach

Systematic DiscretionarySystematic/

Discretionary

2. Analysis Technical Fundamental Technical/

Fundamental

3. Trading Style Momentum

Countertrend Spreads/Others

4. Time Frame -1-5 days 6-20 days > 20 days

5. Markets TradedSingle sector

or market Broadly

diversified

SOURCE: swissHedge article by Gildo Lungarella, Harcourt AG (Nov. 2002)

The Various Investment Approaches of CTAs

Rational For Variance in CTA Returns

15


Prospective investor says, “We don’t invest in black boxes.”

16

Scientists develop fastest computer

This undated handout photo provided by IBM and the Feature Photo Service shows lead engineer Don Grice of IBM inspecting the world's fastest computer, nicknamed "Roadrunner", in the company's Poughkeepsie, N.Y. plant. Scientists unveiled the world's fastest supercomputer on Monday, June 9, 2008, a $100 million machine that for the first time has performed 1,000 trillion calculations per second in a sustained exercise. The technology breakthrough was accomplished by engineers from the Los Alamos National Laboratory and the IBM Corp. on a computer to be used primarily on nuclear weapons work, including simulating nuclear explosions. To put the computer's speed in perspective, it has roughly the computing power of 100,000 of today's most powerful laptops stacked 1.5 miles high, according to IBM. Or, if each of the world's 6 billion people worked on hand-held computers for 24 hours a day, it would take them 46 years to do what the Roadrunner computer can do in a single day. (AP Photo/IBM, Feature Photo Service) By H. Josef Hebert Associated Press Writer / June 9, 2008


Managed Futures and Traditional Assets (1980 – 2008)

Annualized Maximum

Standard Deviation Drawdown

Managed Futures

15.2% -20.4%

S&P500 15.3% -44.7%

EAFE 17.3% -49.2%

Bonds 5.9% -9.0%

NASDAQ 22.8% -75.0%

T-Bills 0.9% 0.0%


Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008)

18

Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted IndexSource: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008, www.hedgefundresearch.comSource: Center for International Securities and Derivatives Markets CISDM, http://cisdm.som.umass.edu/resources/database.shtml

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Managed Futures 27.3%

Equity Hedge Quant

Directional 57.1%

Macro 27.2%

Emerging Markets 79.2%

Event-Driven 6.0%

Equity Hedge Quant

Directional 34.8%


Equity Hedge 23.4%

Equity Hedge 16.0%


Equity Market Neutral 14.6%

FI - Convertible Arb

13.4%



Distressed / Restructuring

18.9%






Macro 46.7%


25.2%

Macro 53.3%

Equity Hedge Quant

Directional 5.1%

Equity Hedge 31.0%

Equity Hedge Quant

Directional 25.5%

Event-Driven 21.2%

Equity Hedge Quant

Directional 9.8%

Equity Hedge 44.2%


14.5%


13.3%


9.1%

Equity Hedge Quant

Directional 37.5%


Equity Hedge 10.7%

Equity Hedge Quant

Directional 16.0%

Equity Hedge Quant

Directional 12.2%

Macro 5.0%

Equity Hedge 14.4%




32.5%

Relative Value 4.0%

Macro 29.3%

Event-Driven 24.8%

Macro 18.8%


Equity Hedge Quant

Directional 41.8%

Relative Value 13.4%

Event-Driven 12.2%

Macro 7.4%


29.6%

Event-Driven 15.0%

Equity Hedge Quant

Directional 10.3%


15.9%

Macro 11.1%

Equity Market Neutral -6.1%


FI - Corporate 41.8%

Equity Hedge Quant

Directional 22.8%

Event-Driven 28.2%


3.8%

Event-Driven 25.1%

Equity Hedge 21.8%

Equity Hedge Quant

Directional 17.6%


Event-Driven 24.3%

Equity Hedge 9.1%


FI - Corporate 5.8%

Event-Driven 25.3%

Equity Hedge Quant

Directional 13.3%


8.4%

Event-Driven 15.3%

Equity Hedge 10.5%

Relative Value -17.5%

Macro 12.6%

Equity Hedge 40.1%


Equity Hedge 27.9%



19.9%


20.8%



7.8%

Macro 17.6%

Event-Driven 6.7%

Relative Value 8.9%

Relative Value 5.4%

Macro 21.4%


Event-Driven 7.1%



Event-Driven -21.5%


6.4%


35.7%

Equity Hedge 21.3%

Equity Hedge Quant

Directional 27.4%



19.7%



Macro 6.2%


16.9%


Macro 6.9%


5.3%


Equity Hedge 7.7%

Macro 6.9%


12.2%

Relative Value 8.8%

Equity Hedge Quant

Directional -21.9%


2.2%

Event-Driven 27.4%

Event-Driven 19.5%


Equity Hedge 2.6%




15.4%

Relative Value 2.8%



2.8%



Equity Hedge 20.5%

Relative Value 5.6%


Equity Hedge 11.7%

Event-Driven 6.7%

FI - Corporate -22.3%

Event-Driven -0.5%


17.6%



FI - Corporate 1.5%



14.6%


Event-Driven 1.7%


14.4%

Macro 2.0%

FI - Corporate 5.4%



Macro 4.6%

Relative Value 6.3%



5.3%


-25.1%

Emerging Markets -3.4%



16.3%


Managed Futures -0.7%




12.7%


-4.2%

FI - Corporate 7.3%



Event-Driven -4.3%


9.9%


FI - Corporate 5.3%

Macro 8.2%


Equity Hedge -26.2%

Equity Hedge Quant

Directional -7.2%




15.2%


-3.7%






Equity Hedge Quant

Directional -9.0%

Equity Hedge Quant

Directional 1.4%

Equity Hedge -4.7%

Relative Value 9.7%





5.1%


-34.4%





Macro -4.3%


Macro 9.3%





Equity Hedge 0.4%

Equity Hedge Quant

Directional -8.5%



1.2%


-1.9%




- Managed Futures - Emerging Markets - Equity Hedge Quant Directional

- Distressed/ Restructuring - Equity Hedge - Event Driven

- Relative Value - Macro - FI Corporate

- FI Convertible Arb - Equity Market Neutral

Past performance is not necessarily indicative of future performance.

For Internal Use Only19

Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008)

6.9%

7.1%

8.0%

10.0%

10.6%

11.9%

12.0%

13.0%

13.4%

13.7%

14.4%

0% 2% 4% 6% 8% 10% 12% 14%


FI - Corporate

Equity Market Neutral

Relative Value

Managed Futures

Event-Driven

Distressed/ Restructuring

Emerging Markets

EH Quant Directional

Equity Hedge

Macro

Annualized Returns (1990 - 2008)

Annualized Maximum

Standard Deviation Drawdown

Macro 7.9% -10.7%

Equity Hedge 9.2% -28.2%

EH Quant Directional 13.8% -28.2%

Emerging Markets 14.7% -43.4%

Distressed/Restructuring 6.6% -26.9%

Event-Driven 7.0% -23.7%

Managed Futures 9.6% -10.7%

Relative Value 4.5% -17.5%

Equity Market Neutral 3.3% -8.4%

FI - Corporate 6.7% -26.3%

FI - Convertible Arb 6.2% -35.5%




-0.20

0.00

0.20

0.40

0.60

0.80

1.00

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

BARS (LEFT SCALE): Annualized Rate of Return

RED LINE (RIGHT SCALE): Correlation to S&P500

Annualized Returns & Correlation to the S&P500Jan 1990 – Dec 2008

Alpha, Beta, Diversification?

Return Correlation

20




Negatively Correlated vs. Non-Correlated

• Same Risk, Same Return • Correlation = (1.00)

$900

$950

$1,000

$1,050

$1,100

$1,150

$1,200

Investment A Investment B Investment C

Investments A & B

• 50% of Investment A & 50% of Investment B • Same Return, No Risk (Standard Deviation = Zero)

Investment C

• Same Risk, Same Return • Correlation = (0.14)

Investments A & B

• 50% of Investment A & 50% of Investment B • Higher Return, Lower Risk (Standard Deviation)

Investment C

$850

$900

$950

$1,000

$1,050

$1,100

$1,150

$1,200

Investment A Investment B Investment C

21This is for illustrative purposes only. Investments A and B are not real investments.


6 Largest Declines in U.S. Stocks Using monthly data

22

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Dec-80 to Jul-82

Sep-87 to Nov-87

Jun-90 to Oct-90

Jul-98 to Aug-98

Sep-00 to Sep-02

Nov-07 to Nov-08

Stocks Managed Futures

(Jan 1980 - Dec 2008)

Indices: U.S. Stocks – S&P500 Index , Managed Futures = CISDM CTA Asset Weighted Index



A Case for Managed Futures - Portfolio Diversification Opportunities(Kip Thompson, Rosenthal Collins Group LP)

(January, 1980 Through December, 2006)

Data: Managed Futures – CISDM Managed Futures Index , U.S. Stocks – S&P500 Index, Bonds – Lehman Brothers Aggregate Bond Index

9.50%

10.00%

10.50%

11.00%

11.50%

12.00%

12.50%

13.00%

8.25% 8.75% 9.25% 9.75%

The Effect of Diversifying a Traditional Portfolio into Managed Futures

0% Managed Futures | 40% Bonds | 60% Stocks





Com

pou

nd

ed

An

nu

al R

etu

rn

Annualized Standard Deviation

Higher Returns Less Risk

23The information on this page was copied from the paper titled “A Case for Managed Futures.” Newedge USA, LLC is not recommending these allocations.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS SIMILAR TO THOSE SHOWN OR WILL NOT BE ABLE TO AVOID SUBSTANTIAL LOSSES. IN FACT, FREQUENTLY THERE ARE SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS; ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.



Risk vs. Volatility

Rolling 12-Month Returns

12

12

16

26

30 30

5

34

1

4 4

21 1

01 1

0

10

5

9

65

39

18

13

7

3

1 1

15

30

15

33

25

18

11

0

5

10

15

20

25

30

35

40

45

<(20%) (15%)-(10%)

(5%)-(0%)

5%-10%

15%-20%

25%-30%

35%-40%

45%-50%

55%-60%

65%-70%

75%-80%

85%-90%

95%-100%

105%-110%

Fre

qu

en

cy

Managed Futures - Hypothetical CTA S&P 500

Managed Futures - S&P500

Hypothetical CTA Index

Annualized Compounded Return 15.5% 10.9%Annualized Standard Deviation 21.2% 14.0%Modified Sharpe Ratio (RF = 0% ) 0.73 0.78 Skewness 1.48 (0.40)

24Past performance is not necessarily indicative of future performance.


One of the most cited reasons for investing in alternative investments (e.g. Hedge Funds) is DIVERSIFICATION.

– What actions have you taken to help your portfolio benefit from this?

Markets move in TWO directions.

– What actions have you taken to help your portfolio benefit from this?

The World’s Portfolio of exchange traded, liquid investments includes EQUITIES, FIXED INCOME, CURRENCIES, AND COMMODITIES

– What decisions have you made within your Asset Allocation Policy about these investment opportunities? (Doing nothing is a decision. Just make sure you have the evidence to back it up!)

A Few Observations

25


Write the research report that proves why you should NOT invest in Managed Futures.

Email me a copy:

[email protected]

The Challenge

26


Risk Disclaimer

27

Global Disclaimer Research Notes-(Last Updated 1 Feb. 2009)

The Alternative Investment Group of Newedge USA, LLC has distributed this research report. Newedge does and seeks to do business with companies that may be covered in its research reports. As a result, investors should be aware that Newedge might have a conflict of interest. For the avoidance of doubt, investors should note that this research report is not objective and is a marketing communication as defined by the Markets in Financial Derivatives Directive (“MiFID”) for more details see MiFID policies on our website at www.newedgegroup.com.

Newedge Group (UK Branch) is authorized by Commission Bancaire and Autorité des Marchés Financiers in France and subject to limited regulation by the Financial Services Authority for the conduct of its UK business. Details on the extent of our regulation by the Financial Services Authority are available from us on request. This research report may have been distributed simultaneously, in multiple formats, to Newedge's institutional customers. This information is not intended for distribution to “Retail Customers” (as defined under MiFID or as defined under other jurisdictions' regulations). This research report is initially written for European and United States of America investors and may not be fit for investors outside the EEA or the United States.

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Subject to the nature and contents of this research report, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Accordingly, investors should, before acting on advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. Newedge accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this research report or its content. Any forecasts are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. This report is for informational purposes only. Past performance is not a guarantee of future results. This research report is not to be construed as providing investment services in any jurisdiction where the provision of such services would be illegal. Not all services are available from all Newedge organizations or personnel.

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Appendix


Commodity Exchange Act (CEA)The federal act that provides for federal regulation of futures trading.

Commodity Futures Trading Commission (CFTC)The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.

National Futures Association (NFA)Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered futures association,” NFA is the industry wide self-regulatory organization of the futures industry.

Commodity Trading Advisor (CTA)A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer’s account. A US-based CTA is generally required to be registered with the CFTC.

Futures ContractA legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

SOURCE:Glossary of Futures Terms:An Introduction to the Languageof the Futures Industry©1998 National Futures Association

The CISDM CTA Asset Weighted Index reflects the dollar-weighted performance of commodity trading advisers (CTAs) reporting to the CISDM Hedge Fund/CTA Database. CTAs trade a wide variety of over the counter (OTC) and exchange traded forward, futures, and options markets (e.g., physicals, currency, financial) based on a variety of trading models. To be included in the asset weighted index universe, a CTA must have at least $500,000 under management and at least a twelve month track record. The index dates to January 1980. The weights are revised monthly. The weight of a fund each month is its assets under management at the end of the month divided by the total assets under management of all qualifying funds. http://cisdm.som.umass.edu/index.asp

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