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August 9, 2010

Whether you are talking about Alternative Investments in Private Equity, Hedge Funds, or Managed Futures; it seems there is a constant race by
the professionals managing investor capital through alternatives to grow their Assets Under Management (‘AUM’) to ever expanding heights. In
the managed futures space, what seemed inconceivable not so long ago – managers with over a billion dollars under management is now quite

According to the latest statistics from BarclayHedge, there are actually 39 separate managed futures programs with over $1 Billion under
management as of the end of May 2010, while the total managed futures industry’s assets under management equal just under $250 Billion.
Even more impressive is the statistic that 53% of that $250 Billion is managed by the ten largest managers, with 970 other managers
comprising the balance.

Compare that with 16 years ago at the start of 1994 when the largest managed futures program was John Henry’s flagship program with just
over $700 Million, and you can see that there has not only been a dramatic increase in assets put into managed futures, but also a shift to the
larger players.

Why does so much money go into the big players. For one, many large institutional investors such as pensions, endowments, family offices and
the like have minimum investment amounts in the tens of millions, and mandates that they can not be more than x% of a manager’s assets.
This means if they are to invest $50 Million with a managed futures program and can not be more than 5% of the managers assets; the
manager must have $1 Billion under management in order to qualify for investment. That sure narrows the field down (from 980 to 39).

Many other factors come into play as well, including the larger managers usually having a longer track record (the top 10 AUM managers as of
Dec 2009 had an average track record of approximately 14 years) and the ability for investment in an offshore fund (a must for certain types of
pensions and trusts). And bigger usually means much more infrastructure, due diligence materials, and the absence of career risk for
whomever has the final say on whether or not to allocate. There is an old saying in the business world that nobody ever got fired for going with
IBM, and the same can probably be said for the big managed futures programs (nobody ever got fired for going with Winton or Transtrend).

As a result of all of this, the bulk of assets rest in the hands of only a few managers (72% of the assets are in the hands of just 4% of the
managers), making it darn near impossible for an up and coming managed futures program to get a fair look from a large institutional investor
(call us when you get to $1 Billion is a line often heard).

But all of this begs the question: is bigger really better? Is the institutional money getting the best performance, or even the best risk
adjusted performance, by going with the ‘safe’ play?

We instantly thought – what a great idea for a newsletter, and began running the statistics to see how the big commodity trading advisors stack
up with the small guys. But we quickly found out this is a more complex question than you realize.

For one, these managers weren’t always this big. We not only want to see how big programs perform versus small programs, but also want to
measure the performance of programs over time as their assets grow. Does performance tail off as a CTA gets bigger?

Next, we wanted to see how similar (correlated) results are between the top AUM managers in their recent history, to see if there truly are so
many ways to ‘skin a cat’, as the old saying goes.

And finally, if emerging managers do exhibit higher returns with higher volatility – is there a place for them in a portfolio with larger managers?
Do they add to the risk adjusted performance of the portfolio?

What did their performance look like before they were big?

There is a natural evolution that takes place for most managers as their assets under management grow. First and foremost, the manager has
more income coming in which can be reinvested into the business. How the manager chooses to reinvest is a business decision on their part,
but what we see more often than not (and what investors like to see) is managers using their increased income to add research members to
their investment team, new offices, sales staff, and technology to improve execution and order entry.

Why is there a need to invest in research and technology? The answer is surprisingly simple. The markets these managers trade on are only so
big, and as a manager’s AUM grows the commodity markets have liquidity constraints (and position limits) forcing the manager to look for
additional markets, models, and or strategies to support the larger level of trading required to attempt to keep pace with past performance. The
largest managers outlined above also must seek out counterparties to take the other side of some of their trades which would put their net
position over the allowable limits on the commodity exchanges.

Traditionally, the hope from a growing manager is to not only allow for additional capacity (meaning more money under management) within
their model, but also to improve the risk metrics (i.e return to risk ratio). There isn’t a manager we have talked to who doesn’t admit they have
learned something from their past trading which has improved their risk controls, and the natural progression for managers is usually to get less
and less risky as time goes by and they learn more and more how to avoid risks. The problem in this is that less risk can also mean less return –
and if you invested in a manager expecting 20% per year, and their newfound risk controls have lowered that down to 15% or 10%, you are not
where you expected to be.

To test whether this natural progression towards less risk and lower returns is real – we looked to identify the largest managed futures programs
in each of the past 5 years and look at their performance back in time from when they were small through to the present with their billions
under management.

Surprisingly, only 14 separate programs have been amongst the 10 largest CTA programs over the past 5 years (not including fund of funds and
managers which started their track records with more than 100 million). Those fourteen are: Aspect Capital (Div. Fund), Blenheim Capital
Mgmt., Boronia Capital (Diversified), Bridgewater Pure Alpha Fund I, Campbell & Co. (F.M.E. Lg.), Chesapeake Capital Corp. (Divers.), Crabel
Div. Futures 4X, FX Concepts (Multi-Strategy), Graham Capital Mgmt (K4D-15V), QFS Asset Mgmt (QFS Currency), Quantitative Invest. Mgmt
(Global), Sunrise Cap'l Partners (Davco Fund), Transtrend (DTP/Enhanced Risk - USD), and Winton Capital Mgmt. (Diversified). Together, they
managed just under $90 Billion (or 42% of total managed futures assets).

The table below shows our test results across these large managers at varying levels of assets under management (AUM), with the first column,
<$250M, representing the average annualized statistics for all programs when their assets under management were less than $250 Million, the
second representing when assets were less than $500 Million (which includes the <$250M stats), and so on. The final three columns show the
performance once the programs were over the listed levels.
(Past performance is not necessary indicative of future results)

@ AUM <$250M <$500M <$750M <$1B <$5B >$500M >$750M >$1B

Avg Annual
RoR 22.0% 20.7% 19.4% 18.9% 15.9% 9.9% 9.4% 9.0%

Avg Annual
Vol 20.1% 18.7% 18.9% 18.7% 15.8% 14.6% 13.7% 13.5%

- - -
Drawdown -16.2% -17.3% -20.9% 20.9% 22.3% -21.0% -19.5% 19.3%

MAR Ratio
(Ror/DD) 1.36 1.20 0.93 0.91 0.71 0.47 0.48 0.47

Sharpe Ratio 3.41 3.52 3.26 3.23 3.12 1.88 1.91 1.83

(the data in this table and the following tables in this article were calculated by taking the monthly returns of each program in our test list during
the time they were managing assets at each of the above levels, and then multiplying the average of those returns by 12 for the Avg Annual
RoR, by the sqrt(12) for the Avg Annual Vol, and using a risk free rate of 2% for the Sharpe ratio. The programs considered were from Attain’s
database only, and may not include the entire universe of managed futures programs)

The results are very telling and suggest that there may indeed be a point of diminishing return as managers grow their AUM and “learn” how to
become more risk averse. The returns definitely fall off, going from 22% per year down to just 9% per year at over $1 Billion under
management. And while we would expect the volatility to also decrease (after all, they are supposedly getting lower returns to also lower risk), it
did not decrease as significantly as we would think given the drop in return. This can be seen with the sharpe ratio, which measures return over
volatility, dropping significantly. In theory, any reduction in return matched by an equal reduction in risk would keep the Sharpe ratio at the
same level.

Another unexpected finding was the drawdown levels – which did not see a reduction as we would expect with rooms full of PhDs working on risk
control. They actually increased as AUM increased, telling us that even at the top of the managed futures food chain, one should expect a new
max drawdown in the future. For a recap of what to expect in terms of future drawdowns review our March 1, 2010 article on Managed Futures
Portfolio Rebalancing (Managed Futures Portfolio Rebalancing)

Correlation of top AUM managers to one another:

Is this reduction in return a function of there only being so many opportunities out there, and all of these big programs fighting for the same
trades? If so, we would expect the largest managers to have a large correlation with another, as they benefit and struggle from the same trends,
lack of liquidity, and so on. In fact, one of the initial hypotheses for this research project was that the largest managers would exhibit a high
degree of correlation to one another due to the fact that there are a finite number of liquid futures markets in the world that have the potential
to support the volume of trading necessary to achieve substantial absolute returns.

The wild card, of course, is that we also must consider what types of strategies the managers are using to execute within these markets.
Without knowing the secret sauce behind each strategy we can only go by what is publically available and in reviewing the program descriptions
of these managers, one common strategy theme that is omnipresent is that the majority are attempting to capture a trend – whether it lasts for
one day or 100 days – and in most cases the largest strategies have evolved into systematic multi strategy algorithms combining trend
following, momentum, mean-reversion, and more into 1 overall model. Baring these details in mind, it would seem that “there are only so many
ways to skin a cat” and long term performance is likely to have a higher degree of correlation to one another.

Referencing 2009 top 10 AUM managers only:

1 Year Average Correlation = 0.287

3 Year Average Correlation = 0.264

5 Year Average Correlation = 0.222

Our findings above showed that these programs are not as correlated as one would think given their high correlation in terms of diminishing
returns over time.

To determine where the difference may have come in, you don’t need to look much further than to the inclusion of two of the most prominent
names in short term trading (Quantitative Investment Management and Crabel Diversified Futures). Thanks to the evolution of electronic
markets and increased market liquidity over the past 5 years and an interest from the world’s most sophisticated investors to diversify their
Managed Futures exposure we have seen significant growth in the short term space.

If we extract both of the above managers from the equation the 1, 3 and 5 year average correlations are much more in line with our original

1 Year Average Correlation = 0.396

3 Year Average Correlation = 0.479

5 Year Average Correlation = 0.433

But these correlations still aren’t high enough to support the argument that diminishing returns are a function of only so many opportunities to
go around. This test seemed to put it back on the managers, not on the environment.

Are smaller managers diversifiers, return enhancers, or both?

One of the main reasons for taking on this research project was to investigate the importance of manager selection and the investor allocation
process within the Managed Futures industry. In short, does it pay to analyze all 980 managed futures programs looking for a diamond in the
rough, or should you just go with the ‘safe’ bet as the institutional money does and invest with one of the big programs.

Given the results of our first two tests above, it sure looks like there are issues with the largest managers (chief among them being diminishing
returns). But are there better choices, then, for investment in the managed futures space. If the best programs have problems, where do you
turn? Away from the asset class altogether?

We definitely don’t recommend turning away from the asset class altogether given all of its benefits (chief among them being crisis period
performance – see 2008), and instead believe the answer is to expand your universe of CTAs to include emerging managed futures programs.
There are many definitions of emerging managers, with some having to do with how long they have been managing accounts. But for our
purposes here, we’ll consider only AUM in defining emerging managers, and define them as those CTAs which have a minimum investment
amount of less than $1 Million.

To see how emerging managers stack up with the big boys, we tested those programs meeting the emerging manager definition across the 71
programs on our expanded list of recommended programs, programs on our watchlist, and dead programs to avoid survivorship bias.

On the first pass we looked into the 1, 3, and 5 year performance comparisons between the two groups, and found that the emerging managers
– while worse over the past 12 months – have generally had higher returns with lower volatility and drawdowns.
(Past performance is not necessarily indicative of future results)

Large Emerging
Managers 1 yr 3 yr 5 yr Managers 1 yr 3 yr 5 yr

Avg Avg
annual annual -
RoR 0.5% 6.9% 8.7% RoR 2.9% 11.8% 13.4%

Avg Avg
annual Vol 12.4% 14.2% 13.3% annual Vol 4.4% 8.1% 7.3%

- - -
Drawdown -9.9% 17.5% 17.7% Drawdown 4.6% -4.6% -4.6%

MAR Ratio MAR Ratio -

(Ror/DD) 0.05 0.40 0.49 (Ror/DD) 0.63 2.58 2.94

Sharpe Sharpe -
Ratio -0.52 1.27 1.70 Ratio 3.82 4.19 5.39

Encouraged by the 1, 3, and 5 year results, but also realizing that the quality of the large managers would likely lead to a portfolio including
both large and emerging managers - not completly eschewing large managers for emerging - we proceeded on to looking at various ‘portfolios’
with different allocations to large and emerging managers.

<!--[if !supportLists]-->1. <!--[endif]-->Equally weighted allocation method – Assumes that equal values were invested in each of the 29 managers
from the lists above.

Weighted 1 yr 3 yr 5 yr

annual -
RoR 2.3% 10.8% 12.2%

Vol 4.5% 7.7% 6.9%

Drawdown 4.0% -4.0% -4.0%

(Ror/DD) -0.57 2.69 3.06

Ratio -3.29 3.96 5.12

<!--[if !supportLists]-->2. <!--[endif]-->Large Manager Skew = 25% allocation to Emerging Managers and 75% allocation to top AUM

Skew 1 yr 3 yr 5 yr

annual -
RoR 0.8% 8.0% 9.8%

Vol 6.5% 8.2% 7.3%

- - -
Drawdown 4.4% 5.3% 5.3%

(Ror/DD) -0.18 1.51 1.85

Ratio -1.49 2.53 3.69

<!--[if !supportLists]-->3. <!--[endif]-->Emerging Manager Skew = 75% allocation to Emerging Managers and 25% allocation to top AUM managers.

Skew 1 yr 3 yr 5 yr

annual -
RoR 2.2% 10.5% 12.2%

Vol 4.5% 7.6% 6.9%
Drawdown 4.0% -4.0% -4.0%

(Ror/DD) -0.55 2.65 3.07

Ratio -3.18 3.87 5.10

Based on the above research, you would be hard pressed to convince me that investing in a portfolio consisting of both large, midlevel, and
emerging managers is not a better choice than risking diminishing returns in a top AUM program. While the Sharpe ratio is essentially the same
across the different emerging levels – the combination of emerging and large managers improves the MAR ratio at equal weighting and 75%


The above research emphasizes the similarities of the largest managers to one another and most importantly the value in diversifying your
portfolio into the Emerging Manager space to avoid what looks like a real problem of diminishing returns amongst large AUM managers. The
problem for most investors is that, beyond the largest names and pedigrees, it is simply too much work to research the close to 1000 programs,
and some multiple of that number for all of the methodologies, backgrounds, and risk parameters that are tied to those programs; to construct
the “optimal portfolio”.

But it is a necessity in order to identify and tap into up and coming talent. In the words of one of our long time colleagues, Tom O’Donnell (a
Partner with The Bornhoft Group - a firm that has been specializing in multi-manager CTA portfolios for 25 years), he agrees that asset growth is
an important part of the manager due diligence process. He says, “The tricky part is determining if the asset growth makes the manager better
at managing money? Or better at counting the money he manages?” The goal in our eyes is to get a hold of a manager when they are good at
managing the money, and not yet thinking about counting the money.

So take a hard look at your portfolio and determine to what extent you are invested in the “same” positively correlated strategies, and whether
those strategies have been doing better or worse than their historical average. From there, give us a call to discuss what additional strategy
components you should be considering.

Jeff Eizenberg

DISCLAIMER Past performance is not necessarily indicative of future results. Investors interested in investing with a managed futures program will be required to
receive and sign off on a disclosure document in compliance with certain CFTC rules. The disclosure document contains a complete description of the principal risk
factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the
most recent five years.


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 | Week in Review |

Week in Review : Stocks continue rebound while Wheat leads commodities higher
Another round of optimism from the latest batch of earnings reports, and a further extension of the carry trade against the U.S. Dollar helped aid a rally in the stock
index and commodity instruments last week. Market participants remained fully engaged as European news continued to show a promising turn of events on the
economic front. News out of Asia indicating a slowdown in growth did little to hamper enthusiasm, although some of the food commodities and a few industrials did
end the week lower on the news.

The week ended with poor results from the U.S. monthly Unemployment Report, but early session pressure on Friday was short-lived as market participants turned
their attention to stronger corporate numbers along with the continued surge in wheat prices. The fireworks in the wheat could possibly set up a price rationing
scenario aiding not only producers, but conglomerates that benefit from a weaker U.S. Dollar. The end result for the week had Stock Index futures posting another
round of price increases led by NASDAQ futures +2.16% followed by S&P500 futures +1.93%, Dow futures+1.88%, Mid-Cap 400 futures +1.70% and Russell 2000
futures +0.06%.

The Food and Livestock sector was mixed as the marketplace continued to reflect a more fundamental picture regarding supply/demand scenarios rather than the
recent correlated moves to the stock market. The grains remained fixed in a weather mode with the drought situation in Russia rallying Wheat prices another
+8.88% which didn’t go unnoticed by Corn +3.30%, Soybeans +2.83% and Cotton +2.48%. Lighter supplies of Cattle in the U.S. helped Live Cattle add +1.06%, but
Lean Hogs -6.00% succumbed to news of higher chicken production which is a direct competitor for market share. Soft commodities found pressure from the
slowdown in the Chinese economy as Sugar -6.80% led the complex lower followed by Coffee -5.05%, Cocoa -2.75% and OJ -1.77%.

Energy price action was mixed as the changing world economic landscape had a fracturing affect on the sector. Despite demand uncertainty weather kept the
marketplace guessing which led to some issues posting rallies and others faltering. For the week Heating Oil futures added +2.84% followed by Crude Oil futures
+2.22% with Natural Gas futures shedding -9.26% and RBOB Gasoline -0.46%.
The Metals sector was mixed despite pressure in the U.S. Dollar as summer trading with lighter volume and interest seemed to be the main factor consuming price
activity. The weekly performance had Silver add +2.43% followed by Gold +1.81% and Copper +1.56%. Palladium finished -2.48% and Platinum ended -0.38%.

Currency futures continued to build on recent momentum of The U.S. Dollar carry trade as the recent favorable Euro banking stress test aided in build confidence in
higher yielding investments. For the week Euro futures rallied +1.79% followed by British Pound +1.56%, Japanese Yen +1.08% and Swiss Franc +0.30%. The
Dollar Index fell -1.42%.

Managed Futures


Multi-Market programs finally picked up the pace in July and are now looking to carry to positive momentum over into August. Shorter-term programs performed
best last month, although trend followers started to come on late in the month. Last week trend followers led the pack with Clarke Worldwide +2.25% and Covenant
Capital Aggessive +2.23% getting a quick start this month. Hoffman Asset also had a nice start to the month at +1.15%.

Other multi-market programs in the black include Auctos Global Diversified +1.06%, Futures Truth MS4 +0.85%, Applied Capital Systems +0.77%, Integrated
Managed Futures Global Concentrated +0.67%, Quantum Leap Capital +0.42%Clarke Global Magnum +0.31%, and Sequential Capital Management +0.04%. GT
Capital and DMH are at breakeven.

Multi-Market programs that started the month of slower include Robinson-Langley -0.04%, APA Modified -0.07%, Mesirow Financial Commodities Low Volatility -
0.24%, Mesirow Financial Commodities Absolute Return -0.38%, APA Strategic Diversification -0.39%, Accela Capital Management Global Diversified -0.64%,
Futures Truth SAM 101 -2.33%, Dighton Capital Limited Aggressive -2.78%, and Clarke Global Basic -3.93%.

Option Trading:

Diversified option programs have had a difficult start to August as expanding volatility in the grain markets caught several by surprise. FCI OSS is down an
estimated -4.00% to start the month, while FCI CPP is at -1.76%. Therefore, if you have been waiting for a drawdown to start trading with FCI, now is a good time to
consider getting involved.

Other option managers in the red include Crescent Bay PSI -0.48%, Crescent Bay BVP -0.78%, Clarity Capital Management -0.78%, Liberty Funds Group
Diversified Options -2.04%, and ACE DCP -2.30%.

HB Capital +1.39% was the lone positive performing option trader last week. Cervino and Kingsview are both at breakeven to start the month.


Specialty and Short Term Index Traders started the month with mixed performance. Emil Van Essen LLC Spread Low Minimum had a great to start to the month at
+1.42% while Ag trader Rosetta came in at +2.19%. Hog trader NDX has both of their programs up so far in August with NDX Abedengo +0.18% and NDX
Schadrach +0.88%, while F/X trader P/E Investments Standard is at +0.39%. Those with a more difficult start included Roe Capital Management Jefferson -0.36%,
Roe Capital Management Monticello Spread -0.81%, Paskewitz Contrarian 3X St. Index -1.04%, and OAK Investment Group Ocrant -4.96%.

Trading Systems

Last week was a quiet week for most trading systems, with most systems trading only once or twice for the week. Unfortunately, the few times the trading systems
did trade they were hurt by the choppy action in the markets and finished in the red for the week.

Bam 90 ES led the way amongst the swing trading systems. Bam 90 ES entered the week long from 7/28 and fought through the choppy action in the market for a
16 point winner at which point Bam 90 ES reversed. Bam 90 ES rode the quick short trade for a $500 profit before reversing again and finishing the week still long in
the market. Bam 90 ES finished last week up $2,055.00. Other positive swing trading results were Bam 90 Single contract ES at $245.00, MoneyMaker ES at
$1,057.50, and Waugh Swing ES at $1,777.50.

Unfortunately, most of the swing trading systems finished in the red last week. Strategic ES had a quiet week only trading once. Strategic ES got long on Thursday
but got a bit unlucky on Friday because the market sold off early and Strategic ES got stopped out. But then the market ended up rallying back up, had Strategic ES
not gotten stopped out it would have been in a profitable position ending the day. For the week Strategic ES was down -$207.64. Other negative results were
Strategic NQ at -$320.00, Jaws 60 US at -$498.75, Moneybeans S at -$653.10, Strategic SP at -$900.00, AG Mechwarrior SP at -$965.00, and Waugh CTO eRL at

Things didn’t get much greener on the day trading side. Leading the way on the day trading side was NPI Traders EC at $977.50. Other positive results for the week
were NPI Traders CL at $573.50 and NPI Traders GC at $369.99.

Unfortunately, day trading systems couldn’t carry over the momentum from July into August. Compass SP had a quiet week, but Compass SP did get short on
Friday but was almost immediately hurt by the rally that took place near the close. For the week Compass SP lost -$975.00. Other negative results included
Upperhand ES at -$80.00, Compass ES at -$217.50, ATB TrendyBalance v2 DAX at -$272.50, ATB TrendyBalance v3 DAX at -$285.00, Rayo Plus DAX at -
$790.00, and Waugh ERL at -$1,340.00.


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

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


Feature | Week in Review |

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