ANALYZING CORRELATION WITHIN YOUR PORTFOLIO

June 21, 2010

With stocks and commodity markets having bounced up off of their recent ‘Euro Zone Crisis’ lows over the past we
managed futures investors have been on a wild ride. There were losses when the up trends in stocks and commod
when many programs got in line with the down trend, and finally - losses in the past two weeks as most markets r
S&P +5%, etc).

With these large moves happening across days, not months – many supposedly non-correlated programs are seein
the same time, leading some investors wondering if the programs in their managed futures portfolio are as non-co

One client remarked that his portfolio’s diversity may only be superficial, as a truly non correlated basket of progra
simultaneous up and down moves of this magnitude in a weeks time.”

What is going on here? Are seemingly diversified portfolios now seeing increased correlation because of markets re
correlated ways? Or are some investors trading portfolios which include programs that are more highly correlated
ideal?

There is a little bit of the former going on. Remembering the old axiom that correlation is the one thing which rise
shouldn’t have been surprised to see an uptick in correlation as the Euro crisis unfolded and people sold assets, no
was even down substantially on one day amidst heavy selling across asset classes.

But an increase in correlation between markets should not necessarily mean an increase in correlation amongst po
investors are in search of the holy grail of combining lowly correlated managed futures programs and trading syste
‘smooth out’ the overall equity curve. And when the equity curve isn’t exhibiting that ‘smoothness’, it pays to anal
to see if you truly are trading a diversified portfolio by looking at the cross correlations between the components.

As a refresher, correlation is a statistical figure with values which range between -1.00 and +1.00, meant to show
data (in this case daily % returns) are. If they have a correlation of 1.00, they are perfectly correlated, meaning w
other will do the exact same, and when one loses -1%, so will the other. If they are at -1.00, they are exactly op
exact opposite amount the other loses each day, and vice versa. The ideal situation is to have the correlation be 0
independently of one another.

Correlation is calculated by taking two datasets and plotting each of the datasets on the same graph. Then usually
(i.e. Excel, Matlab, etc) is used to determine a best fit line through the dataset. Best Fit means that the line is draw
and the best fit line is the one that minimizes the difference between the actual value and the estimated value (th
slope of that line is the correlation coefficient.

To see this graphically, we have examples of highly correlated, non correlated, and negatively correlated program
the highly correlated programs see gains and losses at the same time in nearly every month, with just the magnit
between the two; and how the non correlated programs have some months with gains at the same time, and som
while the other gains.

Past Performance is Not Necessarily Indicative of Future Results

It is a good exercise to view these non correlated returns histogram and get a feel for what non correlated returns
would likely draw a graph with one program making money while the other loses money if asked to depict non cor
correlation, it is negative correlation. These are two separate mathematical concepts, yet many people mistakenly
investments to behave like negatively correlated investments.

Negatively correlated means one investment will do the opposite of another; while non correlated means they will
no regard for what the other program is doing. Over time, that may appear as negative correlation, or “ham and e
picks up the slack for another. But non correlated investments can just as easy move in tandem once in a while. W
over the past few weeks is not a case of the portfolio components becoming unexpectedly correlated and ruining d
case of what Nassim Taleb calls being fooled by randomness (or more correctly in this case – surprised by random
correlated investments (a correlation of 0.00) will effectively post random returns in relation to one another; but t
will not necessarily be in the opposite direction most of the time. And that is what surprises us. In the same way,
random, but still act surprised to see 10 or 15 ‘heads’ flips in a row. It’s random, meaning anything can happen.

Portfolio Goals:

The first step to analyzing correlations within your portfolio is to take a step back and consider what your overall i
and what part managed futures play in that portfolio.

Are you heavily invested in stocks? Then the managed futures portion of portfolio would ideally not include progra
stock market. Are you involved with hedge funds? They have mainly a short volatility profile like option selling ma
it would pay to make sure you don’t have programs highly correlated with option selling. Are you completely out o
are the bulk of your overall assets? Then it may pay to have a program which in fact is highly correlated to the sto
miss out on all stock market rallies.

Many investors get involved with managed futures in order to diversify their “normal” investments in stocks, but g
portfolio underperforms during a stock rally (ala 2009) and start adjusting their managed futures portfolio to inclu
well during the stock rally. Unfortunately, before you know it they have created a portfolio which despite its initial
holdings – is actually increasing stock exposure by adding programs which are highly correlated with the stock ma

Similarly, after seeing option selling managers do well and trend followers do poorly in 2005 and 2006 – investors
portfolios by dropping trend followers and adding option sellers, and in so doing made their portfolio less correlate
performance. 2010 has seen the reverse of that trend, as many investors have dropped multi-market programs in
programs.

To combat this urge to drop and add programs in the name of performance, at the cost of diversification and non c
investors to look at both statistically non correlated investments in addition to what we call fundamentally non cor
Fundamental non correlation is achieved by diversifying amongst different strategy types, such as adding an optio
systematic program with a discretionary one, and so on.

The whole point of this type of non correlation is that the same catalysts are unlikely to cause losses in two fundam
investments. A surprise announcement that the Fed is buying billions in US Treasuries should not affect the spread
example – meaning a Fed event which could make or break a month’s performance for a program like Clarke shou
program like NDX. The end result should be less scenarios where you are wondering why multiple programs in the
down at the same time.

Find your correlations:

After you have decided on the goal of your managed futures portfolio, and whether it is ok to include programs wi
and hedge funds, the next step is to analyze the correlations between each of the programs in your portfolio with
analyze the correlations between each of the programs in your portfolio with each other.

If you find that the option selling program in your portfolio has a correlation of 0.65 with the stock market (as rep
would recommend dropping that program from your portfolio and replacing it with something which has a much lo
[did you know that you can filter Attain’s main CTA performance page by S&P correlation?] Likewise, if you find th
portfolio have a correlation of 0.72, despite one being a discretionary trader and one being a systematic trader – t
of them if the end goal is to smooth out the equity curve.

Not sure how to measure the correlations between the programs in your portfolio, or between them and your port
You can get correlations between various programs, the S&P 500, and the Barclay CTA index by using our free onl
to use it). Or if you are having trouble finding a program you’re invested or interested in while using the portfolio
and we will run a correlation report for you on any programs you choose.

To help you get a start, we’ve listed the five programs with correlations closest to zero, most positive, and most n
categories: Correlation to S&P 500, Correlation to Hedge Funds, Correlation to Managed Futures, and Correlation t
Attain’s platform (labeled inter-program correlations). We used the CSFB/Tremont Hedge Fund and Managed Futu
correlation with those asset classes. Please note that while these indices are designed to represent the performanc
whole, they may not be representative of any specific managed futures or hedge fund investment.

You can use the table below to eyeball if there are any problems in your portfolio – perhaps a program which you
S&P when you are targeting non correlation to the stock market, and so on.

Jeff Malec

Past Performance is Not necessarily Indicative of Future Results

S&P 500 Correlation closest to Zero Hedge Fund Correlation closest to Zero

- -
Chesapeake - Diversified Prog. 0.022 Dighton Capital 0.013

Integrated - Global Investment

Welton - Global Directional 0.024 Program 0.017

Covenant - Aggressive 0.025 Rosetta 0.025

 -
Strategic Ag Trading Grains 0.030 Clarke Capital - Jupiter 0.031

-
Dominion - Sapphire Program 0.033 NDX - Shadrach 0.032

S&P 500 Correlation Most Positive Hedge Fund Correlation Most Positive

ACE - SIPC 0.507 ACE - SIPC 0.703

ACE - DPC 0.377 ACE - DPC 0.582

P/E Investments FX - Standard 0.332 Crescent Bay - Premium Stock 0.476

FCI - Option Selling Strategy 0.291 Covenant - Aggressive 0.391

Crescent Bay - Premium Stock 0.287 Chesapeake - Diversified Prog. 0.348

S&P 500 Correlation Most Negative Hedge Fund Correlation Most Negative

- -
NuWave - Combined Futures (2X) 0.448 NuWave - Combined Futures (2X) 0.529

- -
Quantum Leap 0.409 Quantum Leap 0.266

- -
APA - Strategic Diversification 0.365 APA - Strategic Diversification 0.256

- -
APA - Modified Program 0.298 Clarke - Global Basic 0.189

- -
NDX - Abednego 0.266 Paskewitz - 3X Stock Index 0.170

Managed Futures Correlation closest to

Zero Inter-Program Correlation Closest to Zero

-
Dominion - Sapphire Program 0.009 Paskewitz - 3X Stock Index 0

Cervino - Diversified Options 1X 0.011 ACE - SIPC 0.02

ACE - SIPC 0.013 Dominion - Sapphire Program -0.03

-
P/E Investments FX - Standard 0.052 ACE - DPC -0.04

-
Emil van Essen - Low Minimum 0.056 Claughton Capital 0.05

Managed Futures Correlation Most

Positive Inter-Program Correlation Most Positive

Welton - Global Directional 0.876 Clarke - Millennium 0.36

Integrated - Global Investment

Program 0.851 Hoffman Asset Management 0.36

Accela - Global Diversified 0.822 Mesirow - Absolute Return Strategy 0.35

Chesapeake - Diversified Prog. 0.816 Mesirow - Low Volatility Strategy 0.34

 Integrated - Global Investment
Clarke Capital - Jupiter 0.770 Program 0.34

Managed Futures Correlation Most

Negative Inter-Program Correlation Most Negative

-
FCI - Option Selling Strategy 0.350 FCI - Option Selling Strategy -0.19

-
Paskewitz - 3X Stock Index 0.219 Emil van Essen -Low Minimum -0.12

-
Pere 0.158 P/E Investments FX - Standard -0.05

-
ACE - DPC 0.067 ACE - DPC -0.04

-
Emil van Essen -Low Minimum 0.056 Dominion - Sapphire Program -0.03

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated inv
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material poin
investor returns.

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Feature | Week in Review: |

Week in Review:: Stocks & Commodities Rally for 2nd straight wee
lows
Stocks and commodities rallied for a second straight week on optimistic events in the Euro Zone. The rallying even
indicating industrial production in Europe posted the largest year versus year gain in more than a decade, and stro
only in Spain, but also in Belgium and Ireland. Other news for the week was a Moody downgrade of Greek debt w
commissioners and also led to a call by the U.S. Congress to look into the debt rating environment further to weed
system. Finally two of the largest chip makers in Taiwan indicated orders have far exceeded expectations with the
companies a main factor. The chip news was well received by the stock index sector as the NASDAQ futures +3.64
Russell 2000 futures +2.81%, S&P500 futures +2.32%, Dow futures +2.32% and Mid-Cap 400 futures +1.75%.

The energy complex featured continued growth euphoria from the positive indicators emanating out of the Euro zo
demand for the distillate sector. Heating Oil +6.69% led the rally followed by Crude Oil +4.34%, RBOB Gasoline fu
Gas futures +1.59%.

The balance of the metals performed very well under the promising news of world economic conditions as ideas gr
become prominent again if the health of the world economy can take hold. The optimistic growth scenarios led to
recovery with Silver +6.69% leading the rally followed by Platinum +3.65%, Gold +2.28%, and Palladium +1.41%
pressured by an increase in stocks.
Currencies again featured a strong rally in the Euro +2.29% which was aided by another round of positive economic development
demand for European debt from auctions in Spain, Belgium and Ireland. This also benefitted the balance of continentals with the S
Pound +1.88%. The Yen +0.93% gained added traction from the calm nature of the new governmental structure after the recent r
Minister. Once again the Dollar Index -2.22% felt the pressure from investors seeking higher risk investment in better yielding curr

The commodity and food products investment arena continued to grab support from the optimistic world economic outlook. There
globe that also aided in price appreciation. For the week Coffee +10.95% led the rally followed by Wheat +4.78%, Corn +4.62%, S
+3.01%. The balance of the sector posted rallies of less than 1.00%.

Managed Futures

Spikes across markets like Coffee, Sugar, and Gold propelled a few multi-market managers last week. One manager that took a
market conditions was Dighton USA Aggressive Futures Trading which went long Coffee and rode the rally higher for estimated re
“classic” Dighton trade and is hopefully a sign of good things to come for this program. Other multi-market managers who had a b
Management Global Diversified +2.86%, APA Modified +1.70%, Covenant Capital Aggressive +1.48%, GT Capital +0.80%, Aucto
Diversified +0.34%, and Applied Capital Systems +0.20%.

However, not all multi-market programs enjoyed success last week, as dollar weakness caused markets to chop and reverse the
red for the month include: Mesirow Financial Commodities Absolute Return -0.12%, Mesirow Financial Commodities Low Volatlity
Global Basic -0.97%, Futures Truth MS4 -1.26%, Futures Truth SAM 101 -1.49%, Hoffman Asset -1.58%, Dominion Capital Mana
Integrated Global Concentrated -2.82%, Clark Global Magnum -3.02%, Clarke Worldwide -3.13%, Robinson Langley -3.18%, Qua
Sequential Capital Management -1.29%.

Specialty managers also had a mixed week with Oak Investment Group leading the pack at +1.93%. Hog trader NDX saw its NDX
for the month and the NDX Shadrach fell to -0.51%. Rosetta also has had trouble in the ags and meats this month at -4.03%. Em
Minimum encountered volatility in coffee and is down -6.21% in June.

Leading the option sellers is Crescent Bay BVP at +6.43%. Followed by: Clarity Capital Management at +4.33%, ACE DCP +3.02
Diversified 2X +1.44%, Crescent Bay PSI +1.30%, Cervino Diversified +0.65%, and FCI OSS +0.25%. Option sellers in the red in
Kingsview Management LLC -0.22%, and FCI CPP -3.00%.

Finally, short-term index traders bounced back last week with Paskewitz Asset Management Contrarian 3X Stock Index at +4.34%
Jefferson at+5.29%.

Trading Systems

Last week was a difficult week for the trading systems. The day trading systems struggled more than their swing system counterp
results last week.

Bam 90 ES led the way last week amongst all the swing trading systems. Bam 90 ES started off the week by getting long near the
onto its position during the rally on Tuesday. On Wednesday the E-Mini SP had moved up about 1.8% from the open, Bam 90 ES
for a profit of $1,747.50. MoneyBeans S came in second place with a result of +$1,030. MoneyBeans got long around the openin
in the Soybeans market for a profit of $635. MoneyBeans S then promptly reversed and rode the -2.2% drop down from the high f
positive results for the swing systems included Waugh Swing ES at $45, Waugh CTO eRL at $70, Polaris ES at $132.50, Bounc
at $330, Bounce EMD at $530, AG Mechwarrior ES at $595, and Bam 90 Single Contract ES at $845.00.

Leading the way amongst the day trading systems was Balance Point ES with a return of $522.50 for the week. For the most part
small gains during the week. But the best trade for Balance Point ES occurred on Wednesday, Balance Point ES got short about
benefited from the 7 point drop in the E-Mini SP market during the last hour. The other positive results for the day trading systems
Upperhand ES at $120, and Bounce eRL at $145.00.

On the downside for the week was Strategic ES. Strategic ES came into the week short and profited from that trade by getting ou
the middle of the week, Strategic ES got short near the lows and unfortunately remained short during the rally took place on Thurs
Friday. The other swing systems in red during the week were Jaws US 60 US at -$467.50, Moneymaker ES at -$1,442.50, and St

On the day trading side, Compass SP got long near the high of the day on Wednesday and was able to get out before the big pus
unfortunately it still produced a result of -$1,675. Some of the other results were Bounce EMD at -$205, Compass ES at -$367.50

IMPORTANT RISK DISCLOSURE

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated inv
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material poin
investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Adviso
programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain")
based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should n
individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or n
proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved
accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses
actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: startin
behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and mon
Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/l
website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED B
IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOW
FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULT
BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS I
PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIA
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL T
ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSS
WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELA
GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNT
OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.

Feature | Week in Review: |

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