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Analyzing the FCI Drawdown

November 5, 2007


As you will see below in the CTA section of our month in review, the popular FCI had a second consecutive losing month in October as energy prices continued to head higher, hurting some short call positions they had. With FCI not having consecutive losing months since August 2005, many investors have been calling into Attain for our thoughts and perspectives on the current FCI drawdown. Is it time to worry? Is it time to stop?, they are asking.

Our answers at Attain have been: not too much, and no. Any drawdown can make you worry a little, as no one like losses, but it's important to not let that worry turn into panic or outright fear. And we don't feel we're close at all to saying its time to stop FCI, either from a statistical standpoint or review of the manager's management during this drawdown. The best thing to do, in our opinion, is to stay the course, while at the same time analyzing this drawdown to get a better feel for their type of strategy and the risks involved.

What has Caused it:

The short answer to why FCI is in a drawdown is the Wheat market in September, and Energy markets in October (beginning of Nov). FCI sells deep out of the money options (calls and puts) on commodities, and usually places their strikes between 10% and 30% away from current market prices. That usually gives the market enough room to move around, and FCI's sold options have expired worthless about 90% of the time historically.

But commodity markets can spike at times. And in September, Wheat prices rose an incredible 30% from the price levels present in late August when FCI initiated the trade. This is truly an outlier type of move (30% in a month), and it pushed prices all the way up to and through the levels where FCI had placed their strike price, causing the option prices to increase dramatically and leading to the first leg of FCI's current drawdown.

In October, short energy call positions came under pressure when the Crude market found itself 24% higher than when FCI had initiated the position in late August. This was the second component of the drawdown, and had a double effect of sorts - as the expected gains from the energy positions were not available to offset the Wheat losses, and in fact added to the Wheat losses instead.

It is important to note that FCI is not directly betting on the direction of the underlying commodity prices. In both the Wheat and Energy trades, they could have been profitable even if the market went up. They just can't have a market spike up (or down if short puts) as happened with Wheat in September, and Crude in October. The spike, not the direction, is what hurts a short option selling strategy like FCI.

It is also worth noting that many of the positions which have moved against FCI in the past two weeks in the energies are still out of the money. That is, if the market goes nowhere from here, or even up a little more, FCI can still realize profits on those positions equal to gains of about 14%.

You can see in the chart below that a somewhat abnormal spike in volatility has been the main culprit for the recent open trade losses for FCI. Option trading has three main parameters, time value, intrinsic value, and volatility. With out of the money options, there is no intrinsic value (difference between strike price and current market price), and the time value of the options are low with only 1 week to go until expiration. This means a good portion of the run up in prices on FCI's short option positions has been due to a spike in volatility, not necessarily the move higher in prices. This volatility spike is in stark contrast to earlier in the year, when Crude prices actually rose more than they have recently, but volatility fell.

What is FCI doing about it:

1. The first thing FCI is doing is monitoring the current energy sector positions very closely and very carefully. They have NOT simply sold the options, and ignored them until around the option's expiration date. They are managing the positions hour by hour and day by day, and measuring losses against how much time is left until expiration, the relation of prices to the initial premium collected, each positions losses in relation to the total portfolio, the relation of the underlying prices to the option prices, and finally the overall direction of the underlying commodity.

2. Secondly - they are monitoring the positions in real time to insure they are not shooting past their targets for the max acceptable loss for the whole portfolio in a calendar month, as well as their max acceptable loss limits for individual positions. They don't want a single position to have an oversized effect on the account any more than you do, and manage that monthly loss and individual position loss within the overall program framework to insure against any one position "sinking the ship".

3. They have rolled positions away from the market. One form of defense an option seller has is rolling positions out away from the market to further out strike price, further out expiration dates, or both. This "buys some time" for lack of a better term (actually would be more correct saying this "sells some time"), but the basic principal is to cut your losses on the current position and initiate a new position which is less likely to fall under pressure.

4. They have kept up communication with Attain, and with clients The most important thing Attain likes to see out of a CTA experiencing an uncomfortable drawdown is communication. This is because communication means they are not the proverbial "deer in the headlights", frozen by fear and unsure what to do. That is definitely what we DON"T want to see out of a CTA in a drawdown, and when a CTA is communicating with clients about a drawdown, it is a sign that they are on top of the situation. They may not be happy about the losses, but communication tells us they are not asleep at the wheel.

Attain's thoughts

1. As we mentioned in our newsletter last week - drawdowns happen. It is a part of any investment (look at real estate right now), and is definitely part of a CTA investment. Those who don't panic, base decisions on statistics, and have a plan for when they should consider stopping (or adding to a manager) are usually those who do best in our opinion. If you're invested in FCI, call Attain and work with us to set a 'line in the sand' for your investment. If you've been with them for a while and have only given back profits they previously made you, that line could be a little further out. If you just started and the current DD represent a start trade drawdown (always tougher to handle mentally), then you may want to settle on a stop trade point a little closer to the current DD level.

2. FCI has had success selling calls in energy all year (until now), they aren't trying to pick a top in CL market - and just happened to be in CL when volatility spiked more than could be expected with the move in prices. The drawdown therefore wasn't caused by them doing something outside of their strategy,which is good news. It is unfortunate they have seen losses, but the losses in and of themselves don't worry us from a due diligence standpoint (i.e - they aren't because someone was asleep at the wheel, b/c they got greedy, changed strategy, etc)

3. FCI remains on of our recommended CTAs, we haven't seen anything which has caused us to doubt skill of manager. We haven't seen scenarios such as them being too large and therefore having problems getting orders executed. We haven't seen them run and hide during the Drawdown because they didn't know what to say. We haven't seen them change strategy abruptly to try and get out of the drawdown. Everything we've seen is within our expectations, and merely reflects a down phase for the program.

4. We will continue to monitor FCI's actions, orders, and so on to insure they are sticking with their plan and overall strategy even in the face of a new max drawdown. This is when the pros separate themselves from the pretenders, and Attain has procedures in place to alert clients if we see anything which makes us nervous. For example, if they start doubling up to make money back, going away from strategy (i.e trading outright futures back and forth, etc), or start to hide from us and the clients by not communicating - we will notify our clients that we're uncomfortable.

Bottom Line:

In the end, we remain comfortable with FCI, and believe this is just a normal drawdown phase for the program. When putting the drawdown in the perspective of their overall and year to date performance, it is not that alarming, with a worst case scenario on the current energy positions likely to leave the program right around even for the year to slightly lower. With that being the worst case scenario, and a recovery of about 14% possible just form the current open positions they have, there are a lot of positives to look at from a top down view.

One of the reasons FCI is one of our recommended programs in the first place is their relatively low drawdowns (under 20%), which gave us confidence that even if drawdowns were double that, they would not be catastrophic. In short, there is breathing room.

But even with a bit of breathing room, we do recommend you coordinate with us to set a line in the sand for your account. This will help to take away the possibility of you making emotional, panic driven decisions while FCI is in drawdown, and put the decision in the hands of the statistics.


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Feature | Week In Review: Energy sector rally once again | Chart of the Week


Stock markets around the world climbed higher last month despite having to continue to deal with the sub-prime loan crisis fallout. Huge investment banks including Merrill Lynch and Citigroup wrote off billions of dollars of debt in October and early November causing stocks to become erratic. Unfortunately it doesn’t seem like this crisis will end anytime soon and investors continue to wait for the other shoe to drop, so to speak. In October, SP futures climbed +1.09% while NASDAQ futures climbed a whopping +6.55% after very strong earnings from the tech sector. Russell 2000 futures +2.35% and SP Midcap 400 futures +2.10% were both higher as well, while Dow Jones futures -0.41% were down slightly for the month.

The US Dollar continued to get pounded both on the street and in the press this past month. The Euro is now worth 1.44 US dollars and many expect that this will climb to at least 1.50 before the end of the year. Last month the Euro was up +1.52% against the dollar although the big gainers were the Aussie Dollar at +5.14% and Canadian Dollar at +4.95%. The Yen -0.92% moved slightly lower and the US Dollar Index finished the month down -1.50%.

Besides the sub-prime fallout and weakening US Dollar the other big story on Wall St. is the recent dramatic rise in Crude Oil prices. Crude futures climbed an unbelievable +16.62% in October to $94.53 per barrel and now look to be targeting the all time inflation adjusted record of $101.70 per barrel. RBOB Gas futures +14.53% followed suit as did Heating Oil futures at +12.71% while the historically more volatile Natural Gas futures were “only” up +7.78% for the month.

Elsewhere in commodity trading metals rallied with Gold +6.04%, Silver +3.72%, Platinum +3.53%, and Palladium +6.34% all climbing higher. Only Copper at -4.81% moved lower in the metals sector. Grains were mixed with Wheat -13.95% moving drastically lower while Soybeans +1.58% and Corn +0.67% moved higher. Meats sold off as well with Lean Hogs -15.55% and Live Cattle -4.88% both getting hit hard. Finally in the tropics Coffee futures -5.67%, Sugar futures -2.11% and Cotton futures -1.42% all moved lower for the month.

. ***Commodity Trading Advisors (CTAs)***

There were a lot of questions as to what type of markets CTA’s would be facing heading into October. Was there going to be another Black Monday, was Crude Oil going to run up to $100 per barrel, was the Fed going to cut interest rates yet again, etc? In the end, October was a trend followers dream with stock indices hitting new highs around the world, a continued decline in the dollar rallying foreign currencies, and Energy prices also hitting all time highs.

So, it comes to no surprise that one of the longest running trend following mangers “Clark Capital” posted a gain of +7.9% on his flagship program Millennium. Michael Clark has been managing money since the early 1990’s and started the Millennium program in 1998 – he has been profitable in every year but 1 since inception. Clarke has several programs with varying minimums, so if you are interested in learning more please e-mail us at

Another diversified manger that enjoyed the fruits of October was our own Attain Strategic Diversification Program. The ASD gained +6.8% in October and is now up aprox 23.7% for the year. Long foreign currency positions, plus the success of our intermediate term trading can be cited for the programs success in October.

Investors who have been looking to capitalize on the stock market volatility (i.e option sellers) were also rewarded for their patience in October as most index option selling CTA’s posted gains for the month. Ace Investment Strategist earned +4.8%, BC Capital was up +4%, Crescent Bay earned +3.9%, Zephyr Moderate gained +3.4%, Zenith was up 1.5 -2.3% in both programs, Cervino gained +2%, and Diamond gained +1.2%.

Agriculture Spread traders also had a positive month as this summers volatility appears to be settling down. NDX Shardrach topped the charts with a gain of +3% brining the program to a gain of +7.8% for the year and +30.4% over the past 1 year. NDX Abednego also profited in October gaining +0.8% - the strategy is up 2.1% for the year after a slow start. Finally, Chicago Capital gained +0.5% but is still off -6.7% for the year.

Those investors who have been diversifying into Forex over the past few months were also rewarded in October. In particular, PFG K3 FX was quite impressive with a gain of +4.9% for the month. K3 is now ahead +39.2% for the year and is up 45.8% over the past 12 months. With K3's unique structure allowing for minimums of just $5,000, this is really a program all investors should take a look at, in our opinion. Other FX gains came from Wallwood FX which was +1.9% and PFG Fit FX that gained +0.6%

Finally, the only lagging sector for the month of October was the commodity options sellers. For the month FCI lost -9.6% and CKP Lomax lost -13.7% both mangers were still profitable for the year as of October’s close.


***Day & Swing Trading***

After spending the first half of the month in positive territory, stocks fell sharply to finish the month mostly unchanged. And while there were some large daily ranges (40+ pts in S&P, 55+ ND) there were also a staggering number of intraday reversals that took its toll on the day trading systems. Swing systems were able to stay afloat for the most part with many systems selling into the rallies and trying to buy beaten down indices after large sell-offs.

Among the winners, Compass SP continued its hot 2007, hitting new equity highs in October after tacking on gains of +$4,850. The program is now up over 50 % or ~$15K for the year. BounceMOC eMD had a nice trade towards the end of the month for profits of +$820. If stocks continue to sell off we should see some increased activity for the Bounce systems. OPXP eRL had a strong month with profits of +$490 on ten trades. The system spends less time in the market than any other system traded at Attain despite trading frequently. A typical trade lasts less than 30 minutes for the system as it looks to quickly capture the early weakness in the emini Russell market with its short-only strategy. Rayo Plus Dax had modest gains of +$426.30 on 8 trades for the month. Keystone eRL started the month in the red but fought back to finish the month with a much needed positive - up +$220.

Elsewhere, BetaCon 4/1 ESX finished the month a hair under breakeven with a small loss of -$1.57. RT Viper YM had similar results of -$4.98. Waugh eRL had 12 trades for a loss of -$533.33.

Moving on the swing trading systems, Tzar NQ had a stellar month of October with profits of +$2,770, while SeasonalST eRL and ES both had strong months with profits of +$2,130 and +$1,125 respectively. Mesa Notes finished up +$790.62 after reversing short for a small portion of the month and then reverting back to its long position. Ultramini ES profited +$825 while sister system Ultramini YM lost -$825 on four times as many trades. Bounce eMD had one long trade for a loss of -$30 after it was stopped out near breakeven. Signum eBL got caught up in some choppy conditions early in the month and lost -$1,691.40 but is currently in a profitable long position. Signum TY followed a similar path but only took a hit on one short reversal before reversing back to long where it stands now. Tzar ES and eRL suffered losses of -$2,580 and -$10,338 respectively but have since entered into profitable short trades.

***Long Term***

Activity in long term trading systems gained a little momentum during October, but action was fairly light in comparison to the high volatility in many sectors of commodities. The main catalyst for all of the activity was the energy sector as crude oil marched up to the mid-$90 level on worries of tighter supplies heading into winter which sparked strong rallies in most inflationary sensitive futures such as metals, grains/oilseeds, and foods. The U.S. Dollar continued its trek lower again scoring historic price levels versus several foreign currencies with the rally in energy being one of the main forces, although the Federal Reserve cut key lending rates in late October which accelerated the Dollar downfall.

The grain stars where the soybeans and corn which found support on news that the USDA might look to cut their 2007 production estimates some as harvest results prove that some weather events during the summer may have affected yields some. Gains in corn and soybeans coupled with higher production totals in beef, pork, and poultry sparked pressure in the livestock. The roughly 22% gain added to wheat prices during September was all but gone as October ended with improving weather trends in the in the Southern Hemisphere easing early production fears. The weather improvement in the Southern Hemisphere also took the edge off of improved demand in the food sector as well with cotton, sugar, and coffee losing some of their upside momentum.

Current system positions has Aberration long Bean Oil with a gain of +$1902.00 (open trade), long Silver with a gain of +$1615.00 (open trade), long Ten-year notes with a gain of +$2062.00 (open trade), and short the U.S. dollar index with a gain of +$2950.00 (open trade). Relativity is currently long Robusta making $560.00 (open trade), long Soymeal making +$1800.00 (open trade), short Lean Hogs making +$5030.00 (open trade), short Live Cattle making +$150.00 (open trade), short Dollar Index making +$3360.00 (open trade), and long Aussie Dollar making +$3750.00 (open trade). Aberration exited long KC Wheat +$11542.00 and long Palladium making +$400.00 in October. Relativity exited long Canadian Dollar +$4520.00, long Robusta $2810.00, and short Live Cattle -$720.00 in October.

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.