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MANAGED FUTURES DRAWDOWN, RECOVERY, AND RUN UP CYCLES

October 4, 2010

With several multi-market systematic programs on Attain’s recommended list such as Clarke Capital Worldwide, Integrated, Robinson Langley,
and APA Strategic Diversification program seeing nice gains in September – it brought into sharp relief for us just how cyclical the returns of
such programs can be. Those same names were the darlings of 2008 and laggards of 2009. To now be in the spotlight again sure makes it seem
like they are cycling in and out of favor with some regularity.

In general terms, the past 10 years have looked like this for multi-market systematic programs (formerly called trend followers): 2000-2003:
Up, 2004-2005: Down, 2006-2008: Up, 2009-2010H1: Down, 2010H2-present: Up.

The cycle has seemed to be 2-3 years of nice returns, followed by a year to year and a half of flat to down performance, followed by another 2-
3 years of gains, and so on. Is this cycle real? Or are we just forcing a ‘fit’ here where one doesn’t belong. And if there does seem to be some
cycling between good and bad periods for these types of programs, what can be done to identify those periods before the fact… (doing so after
the fact doesn’t help us ramp up or scale down these managers unfortunately).

To dive further into this; we looked into Clarke Capital Management’s Worldwide program as a proxy for multi-market systematic managed
futures programs over the past 10 years.

The first chart shows each of their ‘major’ cycles over the last 10 years in chronological order (meaning there was a -17% DD period followed by
a recovery which earned 26%, followed by a run up of another 79%, before the next major DD), along with how long they lasted. We defined
the major cycles as: Major DD = drawdown of at least 6 months and over -10% from last equity high, Recovery = gain from DD low to new
equity high, Run Up = move from new equity high to last equity high before new major DD.

Past Performance is Not Necessarily Indicative of Future Results

It is telling to us that each of the DD phases is longer than the recovery phases, and that fits with our experience for systematic, long volatility
type managers who can make significant profits in a short period of time when there are outlier moves in the markets they follow (Wheat rising
~50% in 2 months recently for example).

It is interesting to note the contrast between the long volatility programs with their long drawdown/short recovery profile, and option selling
programs with their short volatility profile which results in a short drawdown/long recovery type cycle. We ran the same analysis on the popular
option selling FCI program, and found that their average drawdown period lasted just 3.5 months, while their average recovery lasted 9 months
(or about 3 times the DD duration). Contrast that with Clarke Capital’s Worldwide program seeing an average DD duration of 19 months and
average recovery of 7 months (about 1/3 of the DD time) and the differences between these two strategies really becomes clear.

Another way to look at the same data to get a better feel for how it cycles are to remove the magnitude of each period, and just look at the
duration of each. The following shows the duration of each DD, Recovery, and Run Up period for the Clarke Capital Worldwide program over the
past 10 years. This view really gives a nice picture of A. how long the DDs can be (a 14 month and 36 month DD) and B. how quick the
recoveries (in yellow) can be. What also surprised us when seeing this view was how long the run up periods have been (that’s an argument for
using a new equity high off a DD for an entry point for CTAs – but we’ll have to cover that in another newsletter).

Past Performance is Not Necessarily Indicative of Future Results


After running the stats above, our curiosity got the better of us and we wanted to see the same on one of the CTA indices. We chose the Dow
Jones Credit Suisse Managed Futures index which goes back to January of 1994 to see if there was a similar look.

Past Performance is Not Necessarily Indicative of Future Results

The data going back to 1994 shows a similar cycle pattern, in our opinion, with 5 major DD periods, 5 recovery periods (including current
recovery 1% from equity highs), and 4 run up periods. The average time between major DD lows was 42 months, or about 3.5 years; which fits
in with the general cycle we mentioned above (2years of nice returns followed by a year and a half of flat to down).

What was slightly different in the overall index data was the recovery length. While the recoveries in 2000, 2002, and 2010 have been shorter
than the drawdown preceding them (like we saw with our systematic manager proxy Clarke); the 1996 and 2005 recoveries were actually longer
than the drawdowns they were recovering from. Some of this may be due to the index including more than just systematic multi-market
programs that have a long volatility profile.

Market Volatility Cycles:

But, as we’re fond of saying – this all begs the question - Why and how do systematic multi-market managers cycle like this?

Without trying to oversimplify things too much, they cycle like this because the markets they follow cycle in and out of periods of trendiness and
increased volatility – both of which tend to be good environments for managed futures.

We put the following chart showing the trendiness of Soybeans going back 60 years in our August of 2009 newsletter ‘What’s Ailing Managed
Futures in 2009’, and it bears showing again here:

Past Performance is Not Necessarily Indicative of Future Results

The chart shows quite clearly that the Soybean market, for one, tends to have some fairly regular ‘boom and bust’ periods as far as trends are
concerned (this has nothing to do with prices, just the movement of prices). The chart shows the 6 month ADX reading of Soybeans on a
monthly chart going back to 1959 (50 years!). The ADX stands for the Average Directional Index, and it is a technical indicator which measures
the so called trendiness of a market. When the indicator is sloping upwards, it indicates that market is in a trending mode, and when the
indicator is sloping downwards, that indicates the trend is ending and/or choppy, sideways market conditions.

You can see from the chart that Soybeans tend to have about one to two major trending periods every four years, which again fits in with our
observed experience of 2-3 years of good returns followed by a year and a half of flat to down.

But systematic managers these days don’t necessarily need long term trends (such as the 6mo ADX identifies) to be successful, some are just
looking for increases in volatility in which to trade short two to three day moves or the like.

To measure how often increases in volatility show up across different markets, we looked at the rolling three month point gain or loss (we use
point gain instead of percentage gain to alleviate issues caused by backadjusting data) for a snapshot of markets used by many systematic multi
-market programs - Wheat, Corn, Soybeans, Euro Currency, and Copper.

We defined when a market was experiencing greater than normal volatility as those times when the 3 month gain or loss in point terms was
above or below 1 standard deviation of the 60 month average 3 month point gain/loss, and then measured how long (in months) it took
between such periods of greater than normal volatility.

Unfortunately, when looking at a graphic display of the rolling three month price gain/loss and when these volatility spikes have happened, most
of the charts looked like the following in Soybeans. The first looks more like random noise than a cycling SIN curve, and there are up to 8 years
between volatility spikes in the second chart. These charts unfortunately don’t show the type of cycle activity we would expect either from our
experience or the circumstantial evidence given by the Soybean trending chart and Clarke Capital cycle periods.
But they aren’t called multi-market systematic traders for nothing… The programs we’re discussing are called multi-market because they look at
multiple markets at the same time. So where there may be 8 years between a volatility spike in Soybeans, and perhaps a similar time in Bonds,
for example; those spans may be offset by four years, making the time between volatility spikes which are beneficial to the portfolio as a whole
just four years (sort of like how they split the Winter and Summer Olympics to occur every two years – even though each on its own occurs
every four).

So when looking at our (admittedly small) snapshot of a full multi-market portfolio (Corn, Soybeans, Wheat, Copper, and Euro Currency) – what
did we see? The results from that test fit with our earlier findings, with the average duration between volatility spikes on the markets we tested
coming in at 34 months (right around that same 3-4 year time frame).

What are the takeaways?

For starters, plan on investing in a multi-market systematic program for at least four years. From what we have seen tracking such programs
over the years, that is about as long as it takes for markets to fluctuate between contracting and expanding volatility (the latter being the good
environment for these types of programs). And from what we have seen

Secondly, be careful when adding to a program when at new equity highs. If it has just put in a new equity high after a drawdown period
(representing the end of the recovery period) - that appears to be a good time. But if it is a new equity high several months into a new run up
period - that appears to be tempting fate somewhat – as the odds of a new cycle occurring which pulls the program into drawdown increase with
each month the program remains in the run up period.

And finally, don’t panic when a multi-market program is losing and has been for several months (12-36). They are long volatility programs which
are set up in such a way as to ‘survive’ through those poor cycles by taking numerous but small losses, and then recoup those losses in a much
shorter time frame (remember Clarke’s ratio of 7 months recovery to 19 in DD) when and if markets cycle back to periods of volatility spikes.

Jeff Malec

IMPORTANT RISK DISCLOSURE


Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect
investor returns.

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Feature | Month in Review |

Month in Review : Multi-market and specialty managers post gains in Sep., while
option sellers struggle
September was a month of optimism for the majority of commodity and stock index futures as an overall rally was fed by a bevy of favorable economic data not only
in the U.S., but in emerging economies as well. The FOMC meeting provided additional fuel, with indications that they are ready to provide more quantitative easing
to make sure the economic ship stays the course of sustained growth. This was backed by indications from the U.K. and Japan that they were ready to apply the
same guidance to their recovery efforts.

The Bank of Japan also stepped into to try stem a further advance in their currency which has crippled their export markets by selling an estimated 2.1 trillion Yen in
September. In Europe the ECB indicated that they were engaged in plans to gradually end stimulus as economic reports have indicated growth in the manufacturing
and export sector have aided a firm recovery. Asia and Pacific Rim news was also satisfactory for the marketplace as signs of expansion in areas that were a bit
shaky earlier in the year aided in stronger market performance.

While the news of government propping up prices helped those items for which prices would be propped (bonds, commodities, stock indices), the news spelled
doom for the U.S. Dollar index, which fell -5.5% to 8+ month lows and experienced the worst quarterly fall in over 7 years.

The soft and grain sectors performed well with the circumstances regarding the U.S. Dollar and the export markets and had world weather issues also sprinkled in
which made for some exponential rallies. Sugar +21.53% was the largest beneficiary followed by Cotton +18.24%, Corn +12.84%, OJ +11.79%, Soybeans +9.56%,
Cocoa +2.85%, Coffee +2.58% and Lean Hogs +2.18%. The laggards for the sector were Wheat -1.69% and Live Cattle -0.45%.

U.S. stock index futures again added on to their string of strong monthly performances and closed out the best quarterly advance in more than a year as September
came to a close. Bolstered by the FOMC stance on the possibility of more quantitative easing and a building optimistic front from recent economic activity was the
best mixture of ingredients to attract strong investment inflows into this sector. The scoreboard for September had NASDAQ futures +13.14 followed by Russell
2000 futures +12.59%, Mid-Cap 400 futures +11.31%, S&P 500 futures +8.95% and 7.89%.

September in the Metals complex was filled with another round of strong appreciation as the rally was stoked by the pro-growth atmosphere and the falling U.S.
Dollar. For the month Palladium finished +13.83% followed by Silver +12.29% Platinum +8.51%, Copper +8.35% and Gold +4.75%.

Energy futures sentiment was also aided by strong growth possibilities and U.S. dollar ailments along with news that production had slowed on the heels of past
consolidation in price activity. Once the complex shed the slumber the new flow of capital aided a strong price rally with the September advance the largest since
May 2009. Heating Oil +12.52% led the way with RBOB Gasoline +9.45% and Crude Oil +8.74% in tow. Natural Gas -6.65% was hampered by heavy supplies.

Market activity in currency futures for September was a picture of change in market psychology after monthly economic reports from several European countries
showed growth, especially in business and manufacturing. The majority of the complex was also aided at the expense of the U.S. Dollar by FOMC indications of
another round of quantitative easing could become reality. The rally was led by the Euro +7.49% followed by Swiss Franc +3.31%, British Pound +2.45% and
Japanese Yen +0.85%.

Managed Futures

[Want the monthly report sooner: We’re posting monthly estimates on the Managed Futures Blog on the 1st business day of each month. Click here to view the Oct.
1st report.]

Strong commodity trends in grains, metals, & softs buoyed by a weak US Dollar propelled most multi-market CTAs in September to nice gains. Based on our early
estimates; Covenant Capital Management Aggressive is the top performing multi-market program September. Covenant holds long positions in many of the sectors
listed above and saw gains of approximately +11.40% for the month. Right behind Covenant is Robison-Langley Capital Management at +9.15%. RL and Covenant
were running neck and neck for top honors up until the last few days when Covenant pulled away. Regardless, both programs had a great month of trading.

Other multi-market traders with impressive results in September include Attain Portfolio Advisors Modified Program +6.95%, Clarke Worldwide +6.00%, Attain
Portfolio Advisors Strategic Diversification +4.51%, Auctos Capital Management Global Diversified +4.16%, Hoffman Asset +1.40%, Futures Truth SAM 101
+1.48%, Accela Capital Management Global Diversified +1.44%, Clarke Global Magnum +1.01%, GT Capital +0.85%, Futures Truth MS4 +0.63%, Integrated
Managed Futures Global Concentrated +0.38%, and Sequential Capital Management +0.32%.

Unfortunately, some programs were unable to post positive numbers despite the optimal trading conditions. Programs in the red include Mesirow Financial
Commodities Low Volatility -0.18%, Mesirow Financial Commodities Absolute Return -0.30%, DMH -0.35%, Dominion Capital Management Sapphire -2.60%,
Clarke Capital Global Basic -2.60%, Quantum Leap Capital -3.00%, Applied Capital Systems -3.80%, and Applied Capital Systems 2X -4.00%.

Short-term index traders posted mixed returns with Roe Capital Management Jefferson +1.48% and Roe Capital Management Monticello Spread +1.28% posting
positive returns, while Paskewitz Asset Management Contrarian 3X St. Index -8.16% and Pere Trading Group -3.32% were down for the month.

After 18 months of declining volatility and impressive returns for option traders, September was a quick reminder of the need for diversification into long volatility
strategies for investor portfolios (see multi market manager update above). Option trading managers that did turn a profit for the month include ACE SIPC +0.83%,
Crescent Bay PSI +0.46%, and ACE DCP +0.30%. All others who were on the defense for the month and ended down include: Cervino Diversified Options -0.34%,
Cervino Diversified 2x -0.51%, Clarity Capital -1.62%, Kingsview Management -2.23%, Crescent Bay BVP -3.36%, HB Capital -4.8%, FCI OSS -8.96%, and FCI
CPP -13.46%.

Specialty market managers have been a highlight in investor portfolio for 2010 and September was no exception. The month’s top performers were agriculture
specialists Oak Investment Group +13.87% and Rosetta Capital Management with an estimated +8.21% return for the month. Oak has been fighting their way back
from earlier 2010 losses while Rosetta added to their 2010 gains (+6.5% through August).

Other specialty market manager estimates for the month include gains from NDX Shadrach +3.32%, AFB Forty Eighter Gold +2.26%, NDX Abednego +1.13%, Emil
Van Essen Spread Program +0.96%, and Cervino Gold +0.95%. 2100 Xenon Fixed Income was down the only specialty manager to end down with an estimated -
1.75% loss.

Trading Systems

The end of September was a welcome sight for most day trading systems, as they struggled during the month due to the lack of continuation in the moves that took
place during pit hours. On the other hand, swing systems would have preferred to see September last a little longer because many of the swing systems produced
profitable results due to the big overnight moves that were taking place in September.

Leading the way for swing systems was Bam 90 ES, with a profit of $8.937.50 for the month. Bam 90 ES was the beneficiary of some big overnight shifts in the
eMini S&P 500 market. For example, Bam 90 ES was long in the market when the market moved up 13 points from the close on 9/23 to the open on 9/24. A similar
situation also occurred between the 8/31 close and 9/1 open. The rest of the system results were MoneyBeans S at -$5,867.50, AG Mechwarrior ES at -$1,225.00,
Bam 90 M Squared ES at $1,272.50, Strategic ES at $1,325.87, Bounce ERL at $1,730.00, Bounce EMD at $1,780.00, MoneyMaker ES at $1,982.50, Bam 90
Single Contract ES at $2,005.00, TurningPoint X2 ES at $2,927.50, and Strategic v2 SP at $6,728.32.
On the day trading side things weren’t as pretty. Many of the systems that trade Equity Index contracts were caught on the wrong side when the markets reversed
direction. Upperhand ES suffered through this quite a bit. On 9/14, UpperHand ES sold short shortly after a 4 point drop in the eMini S&P 500 market. Once
UpperHand ES got short, the market promptly reversed directions and moved up 10 points. Similar situations happened on 9/28 and 9/30. Other day trading system
results included NPI Traders EC at -$2,105.00, NPI Traders US at -$1,586.25, NPI Traders S at -$1,385.21, UpperHand ES at -$800.00, Compass SP at -$375.00,
NPI Traders ES at -$357.50, Compass ES at -$97.50, NPI Traders GC at $497.50, NPI Traders CL at $530.00, BounceMOC EMD at $1,275.00, and BounceMOC
ERL at $1,360.00.

IMPORTANT RISK DISCLOSURE


Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect
investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex
programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance
based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the
individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes
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 on a single contract basis in client
accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The
actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market
behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques.
Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this
website.

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

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 OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE
FREQUENTLY 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 OF 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 AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.

Feature | Month in Review |

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