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CTA Spotlight: Zenith Resources Inc.

February 13, 2006

In addition to our monthly "System Spotlight", the Attain Alternatives newsletter will also do a CTA spotlight about once a quarter. For a quick refresher, CTA stands for Commodity Trading Advisor. CTAs manage accounts for individuals and institutions, and usually charge a 1%-3% annual management fee as well as 15% to 30% incentive fee - or share of the profits.

Some of the best performing CTAs over the past three years have been option sellers who have taken advantage of the historically low volatility in US stock indices and to a lesser extent US bond markets over that time. As highlighted in last week's newsletter, volatility is at 20 year lows according to the CBOE's VIX index.

There's an old saying that likens selling options to "picking up pennies in front of a freight train", but the freight train simply hasn't come down the track in a while, enabling option sellers like Zenith Resources to knock out consistent profits month after month. How consistent?

Would you believe Zenith Resources' flagship Index Options program has had just FOUR losing months our of 74 months of trading since inception. That's 94.5% of months profitable over 6+ years. So much for the old saying about picking up pennies in front of a freight train, looks like he's picking up quarters instead of pennies, and there's no trains in site. Our CTA spotlight is on Zenith Resources:

Who is the Manager?

Ed Padon is the President of Zenith Resources, Inc. and is directly responsible for all trading and money management decisions made by Zenith Resources, Inc. ("Zenith Resources").

Mr. Padon attended Southwestern Adventist University and graduated in 1982 with a BBA degree in Accounting. Prior to entering the trading and management business, Mr. Padon was president of a construction and development company which built and developed both residential and commercial properties. Mr. Padon was involved in the estimating, financing and construction supervision of the projects, and was even elected a councilman for the city of Keene, Texas.

Mr. Padon started in the commodity business in 1990 after divesting himself of all of his former duties and holdings. He started out trading his own accounts, utilizing technical indicators and bar charts for trading decisions. In December of 1995 he became an "Associated Person" with Complete Price Management and started opening and trading accounts for others. In August of 1998 he opened a branch office of Emery Commodities, which was named Zenith Resources. Zenith then registered on July 14, 2003 as a Commodity Trading Advisor, so that the system can be introduced to and utilized by a larger number of Clients.

Mr. Padon has done extensive research in the development of proprietary formulas, for use in the trading of options on stock index futures. After testing and legitimizing the formulas for use in the S&P 500 futures options, the system has been utilized to manage account(s) for six plus years.

When not managing over $20 Million, Ed's hobbies include fishing and woodworking in the small rural town of Godley, Texas. The population of Godley is a mere 650, leading Ed to remark that the town may have "more cattle than people". Ed has been married for over 20 years, and has a five year old daughter.

How does the Program Work?

The objective of the trading programs is to achieve a steady and consistent rate of return through the speculative trading of options on futures contracts. This objective can entail a comparatively high level of risk. Zenith Resources uses a systematic approach to trading, in that it relies heavily on a program of selling or "writing" out of the money options. They may also, from time to time; purchase options to reduce risk exposure. The Index Option Program engages in the strategy of selling or "writing" put and call options on the S&P 500 futures. In the Diversified Option Program a broader portfolio of options and futures contracts including agricultural, energies, metals, currencies and financial instruments may be traded.

The implementation of the programs each month depends on two proprietary formulas that utilize historical and implied volatilities. They determine the strike prices of the initial option positions, which will be written for the next month's expiration. Consideration is also given to technical and fundamental conditions in order to give the best risk/reward in the manager's opinion. Option contracts are written at a sufficient distance out of the money to allow as much room as possible for the options to expire worthless.

There are a couple of additional items a client should know when investing in the programs. Each month the primary trades occur around the third Friday of each month, and the advisor believes it is possible for a client to make a slightly higher rate of return if they plan their deposits or withdrawals around that time period. In addition, Put positions are sold each month based on one position per $10K of equity in a client's account, and the advisor believes a client will tend to make a better return on their account if the value of the account is in $10K increments.

The advisor believes that an investment strategy can only be as successful as the discipline of the manager to adhere to its requirements in the face of market adversity. Unlike discretionary traders, whose decisions may be subject to behavioral biases, Zenith follows a disciplined systematic program that extensive research has shown should produce a positive expectation over time. In the programs, the average statistical risk of a short option trade going "into-the- money" has been less than 2%. This equates to a 50 to 1 chance for the options to expire worthless.

Zenith also offers a Diversified Options program which allows the advisor to branch out to different markets besides S&P options; including agricultural, energies, metals, currencies and financial instruments. This may be a huge help in "finding yield" if the volatility continues to decline in the stock index markets moving forward.

Attain Comments:

If you can put aside any worries about the risk of selling options, there is a whole lot to like about Zenith. A 74 month track record, only four losing months in 6 years, a Max DD of just over 3% on a month end basis (-14% on a daily basis), and average annual returns of close to 28%.

You would expect statistics like these on a manager that is closed to new investments and has minimums of $10 Million or so. But here is Zenith with a minimum investment amount of just $50,000 !

So what's the story here? Why hasn't Zenith hit the big time yet? Well, the main reason has to be its option selling strategy. Option selling simply scares people, with the theoretical unlimited risk. But as option sellers will tell you - it's only unlimited if you fail to "get out". A short futures position has theoretically unlimited risk too, but most investors don't ever worry about that risk because they use stops or get out at the end of the day, etc. The other knock against Zenith is its rather large margin to equity ratio of 40% to 70%.

In the end, the results are hard to argue with, even if the option selling risk worries you. A good test of the size of that option selling risk is to look back at the most volatile event we've had in the past 10 years, the 9/11 tragedy. Zenith did struggle during Sep. 2001 as the market moved against the positions immediately following 9/11 to the tune of -7.5%, but the loss stood at just -3.1% by the end of the month. (hardly the freight train we've been warned about).

As mentioned earlier, the ability to get involved with a professional CTA for as little as $50,000 is appealing as well - with most advisors with track records over 6 years and over $20 Million under management requiring initial investments in the millions.

Many investors have flocked to the ACE Investment program over the past two years, as that option selling CTA has done pretty good itself. But with that manager's assets ballooning from less than $1 Million just three years ago to over $90 MM and performance declining every year since inception, Zenith looks like a better choice, with a longer and more consistent track record and more room to grow to the upside. There is also the added bonus of lower commissions, a 0% management fee, and no up front sales fee as many investors pay with ACE.

Call Walter Gallwas or Jeff Eizenberg at 800.311.1145 for more information on Zenith or to get started trading the program.