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rotella capital management

2. This presentation has been prepared solely for the purpose of acquainting clients and friends with the services offered by the trading advisor and does not constitute a recommendation or endorsement of any advisor or trading strategy. This presentation is subject to and qualified in its entirety by the advisor's disclosure document and the investment management, advisory or other agreement between the advisor and its clients. Obtain and review a copy of the advisor's disclosure document bef1145

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rotella capital management

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    1. 1 Rotella Capital Management PRMIA April 10th 2003

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    3. 3 Presentation Outline Quick presentation of Rotella Capital Management Risk Management A walk-through 2002

    4. 4 Rotella Capital Management Introduction Rotella Capital Management, Inc. (“RCM”) was founded by Mr. Robert Rotella in 1996 after trading investor capital since 1991. RCM is registered with the CFTC as a CPO and CTA, and is a member of the NFA. RCM has approximately $920 million in AUM as of April 1, 2003. RCM is a constituent of the following indices: S&P Hedge Fund Index (4 Managers per strategy) S&P Managed Futures (14 Managers) Carr Barclay Index (21 Managers) Barclay CTA Index (326 Managers)

    5. 5 Philosophy: The market is bigger than we are. We look for opportunities to profit when the market allows, while attempting to avoid large losses during more difficult times. Trading Strategy: Systematic Models: 11 computerized technical systems with short, medium and long term views. The models are applied to 80+ markets traded. Discretionary Overlay: The leverage, sector & market allocations may be adjusted, most often, on a quarterly basis. The sector allocation ranges are as follows: Rotella Capital Management Philosophy & Trading Strategy

    6. 6 Rotella Capital Management

    7. 7 Rotella Capital Management Risk Management Diversification on dual dimensions Stop Losses Discretionary overlay Operational Risk Management Development of additional Risk Management Tools Statistics

    8. 8 Diversificationon dual dimensions 80+ markets traded (divided into four sectors: Equities, Interest Rates, Currencies, and Commodities) 11 Models with different timeframes (ST, MT, LT). The diversification arises mainly from the timeframe effect

    9. 9 Stop Losses Trading Stop Losses are a key component of Risk Management. They help control the losses. However, this protection is not infallible. Volatility or price discontinuity may result in exiting the position at a weaker level than the stop loss. Setting a stop loss is part art/part science. It should be: Fairly close from your entry, in order to limit your losses to a small amount. But not too close, in which case the stop loss is hit too frequently. Volatility should therefore be a key parameter for stop losses. Stop loss levels can also be adjusted when generating profit in order to lock in some of the gains (“Trailing Stops”).

    10. 10 Stop Losses &Return Distributions CTAs exhibit return distributions with right tails. Although CTAs incur more frequent small losses (due to stops), winning trades tend to be significant. ? LONG OPTION DISTRIBUTION TYPE

    11. 11 Discretionary Overlay Discretionary de-levering in drawdowns. This will reduce the severity of the drawdown but potentially increase its duration. Discretionary sector and/or market re-allocation (on a quarterly basis usually) Model Development and Selection.

    12. 12 Operational Risk Management Trading – Operations: Verification & Reconciliation (mainly exchange traded instruments) Cash Management: Non-trading personnel Organizational Risk: Conflict of interests, internal audit Compliance: A full time position Disaster Recovery / Business Continuity Plan Use of INDEPENDENT third-parties: Administrator Auditor

    13. 13 Development of additional Risk Management Tools Improved Risk Reporting Systems Monte-Carlo VaR analysis (capturing stop losses, slippage and non-linear scenarios) Stress-test scenarios: Historical and Synthetic

    14. 14 Statistics (1) Past performance is not necessarily indicative of future results

    15. 15 Statistics (2) Past performance is not necessarily indicative of future results

    16. 16 Rotella Capital Management

    17. 17 Rotella Capital Management A walk through 2002 On the Markets’ side Markets were characterized by several reversals in late 2001. January & February continue to show trendless patterns. Mixed trends in March & April. Only currencies did fairly well.

    18. 18 Rotella Capital Management A walk through 2002 On the Markets’ side May was the transition month, CTAs did generally well. In June, trends especially in the currency markets were strong. July & August, trends continued notably in the equities & interest rate markets. Currencies suffered a bit.

    19. 19 Rotella Capital Management A walk through 2002 On the Markets’ side September is a transition month in the Markets. In October & November, markets showed high-volatility & reversals. In December, strong trends appeared especially in the currency and interest rate sectors.

    20. 20 Summary Our Risk Management is A mix of systematic & discretionary measures. A mix of pro-active & reactive measures. Even though our risk management has been successful in the past, we keep researching ways to further improve it.

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