Trading Description:
This system utilizes a computerized technical trend-following strategy with various levels of money management techniques. The principal objective is to profit from sustained futures price trends. Trend following is a method of trading which seeks to establish and maintain market positions based on major price movements.
The system first determines whether the S&P market is in a bull or bear trend, then trades only with the trend until it gets stopped out. A stop would occur when the S&P moves out of the current trend but has not yet entered into the opposite trend. Within the Trend Following System, proprietary short-term counter-trend signals may be used to get out of the current position or even trade against the trend on a short-term basis.
Premium Capture System: Within this program, DCM will also write covered and/or uncovered options to capture premiums to increase the potential profits. (Option positions may also increase the risk of market exposure from time to time.) Each month puts and calls will be written - the goal being to capture the premiums either by letting the written options expire or by purchasing them back at lower price.
The Volatility Index (also known as the VIX) will be used to determine the number of options to sell and what strike prices to be utilized. Strict risk controls will be in place to limit the downside risks and achieve a desirable risk/reward ratio.
Use of Trend-Following Analysis
The trend following portion of the program may utilize sort-term, medium-term or long-term positions. The program may trade both the long and short sides of the market. In its evaluation of the markets, DCM employs a trend-following strategy. One method of successful speculative commodity trading depends upon establishing a position and then maintaining the position while the market moves in a favorable direction. The trader then seeks to exit the particular market and may establish reverse positions when the initial trend either does not materialize or reverses. Trading will not typically be successful if the particular market is moving in an erratic and non-trending manner. Because of the nature of the commodities markets, there will be frequent false-trends. A pure trend-following trading system, method, strategy or model will never direct market entry or exit at the most favorable prices. Rather, this type of trading method seeks to close out losing positions and to hold portions of profitable positions for as long as the trader determines that the particular market trend continues to exist and liquidates when the trend reverses. As a result, the number of losing transactions can be expected to exceed the number of profitable transactions. However, if the approach is successful, these losses should be relatively smaller and should be more than offset by a few larger gains.
Use of Stock Index Options
The option trading for this program is based primarily on writing out-of-the-money call and put options with the expectation that the options will either be bought back at a lower price or expire. In order to efficiently control risk, based on a proprietary risk control system developed by Mr. Hu, the trader will roll out of positions either vertically (to a further month) or diagonally (further out-of-the-money), as determined by current market conditions. From time to time, options may also be rolled closer to the underlying futures price if the perceived risk/reward is favorable. Technical analysis, chart reading and pattern recognition are used to determine which options to write for each monthly cycle. Occasionally, options may be purchased to either hedge positions or speculate on substantial movement in the underlying stock index.
Risk Strategy:
N/A
Background:
M. Kelly Farrell has over 34 years of investment experience. In June 1987, she began her career as an assistant to three executive securities brokers at Prudential Bache Securities in Milwaukee, Wisconsin, which provided sales and trading in US and foreign equity securities. In March 1989, Ms. Farrell left Prudential Bache Securities LLC and joined the Institutional Custody Department at Firstar Bank, N.A., as an Institutional Custody Service Representative. She assumed a management position in 1992, supervising Institutional Custody Service Representatives who had the responsibilities of interfacing with over 200 Registered Investment Advisors, providing short term cash investments, portfolio trade settlements and various other related institutional custody services. Ms. Farrell became the Trading Desk Manager and General Securities Principal for Firstar Investment Services in May of 1997, where she supervised Registered Representatives on both the fixed income institutional sales and trading desk, as well as the retail brokerage-trading desk. Ms. Farrell assumed the lead trading position as the Fixed Income Product Manager for Firstar Bank's Fixed Income Department in February of 1998. Ms. Farrell moved directly into institutional sales for Firstar Bank's Fixed Income Department in January of 1999 until January 2001, working with correspondent banks, trust accounts, money managers, mutual funds and high net worth individuals, increasing sales revenue by 500% in 2000. She also assisted the Fixed Income Product Managers perform various trading functions. During this time, from January of 2000 through December of 2000 Ms. Farrell also acted as a General Securities Principal for Quasar Distributors LLC (division of Firstar), a mutual funds distributor, in a consultative capacity, and to provide managerial and principal back up. In connection with her registration as a Registered Representative and General Securities Principal, Ms. Farrell passed the Series 7, Series 24 and Series 63 licensing examinations. Ms. Farrell left Firstar in January of 2001 to form Lochlan Capital Management. After January 2001, she worked on developing an option trading program and offered that program to clients of Diamond Capital Management in November 2002. In July 2001 Ms. Farrell passed the Series 3 and was registered as a NFA Associated Member. Ms. Farrell became registered as an Associated Person ("AP") and became listed as a trading and operational principal of the Lochlan Capital Management LLC, a registered CTA, on August 10, 2001. In addition, Ms. Farrell became registered as an AP of R&S Investment Services LLC, a registered CPO, and as an AP and trading principal of Inlet Asset Management Inc, also a registered CPO, in August of 2001 until February 2002. Ms. Farrell remained a NFA Associated Member until February 25, 2002 at which time she withdrew to form Diamond Capital Management. Ms. Farrell became registered as an Associated Person ("AP") on November 12, 2002 and became listed as a principal of Diamond Capital Management on November 11, 2002. Ms. Farrell became registered as an Associated Person ("AP") of Cauldron Investment Co LLC, a registered CTA with a 4.7 exemption, in March 2013 until April 2014. Ms. Farrell acts as both an operational and trading principal.
Alan Hu graduated from UC Berkeley in 2006 with a Bachelor of Arts in Interdisciplinary
Studies focusing in economics, statistics, and psychology. Pursuing an interest in the booming game industry, he started his career designing complex core systems for a number of computer and mobile game startups in Silicon Valley. From December 2010 to September 2012 Alan worked for Idle Games as a Lead Game Designer, and from November 2012 until July 2013 for The Playforge as a Senior Game Designer. After 7 years in the game development industry he decided in a change of direction, taking an opportunity to apply his analytical and statistics-based skills towards investment management. Alan joined Cauldron Investments and Diamond Capital Management in October 2013. In September 2013 Mr. Hu passed the Series 3 and was registered as a NFA Associated Member. Mr. Hu became registered as an Associated Person of Cauldron Investments LLC in October 2013 and later became a branch manager in September 2019. On April 29, 2016 Alan became listed as a principal of Diamond Capital Management and of Cauldron Investments LLC. On February 19, 2019, Alan became listed as a branch manager and Associated Person of Diamond Capital Management and withdrew as branch manager and Associated Person of Diamond Capital in November 2019. Alan revamped Cauldron's organizational infrastructure, codified the subsystems of Cauldron's SIP and Diamond's ESP programs, and continues to develop those programs through perpetual research and analysis. Since 2014, he has primarily focused on trading, risk management, research and product development for the ESP program, playing a key role in the continued success of the program. Mr. Hu acts as trading principal for Diamond Capital Management. Mr. Hu's principal status for Cauldron Investments LLC was withdrawn on April 3, 2020. In addition, Mr. Hu's branch manager and associated person statuses for Cauldron Investments LLC were withdrawn on February 19, 2020.
Accounting Notes:
Due to the MF Global bankruptcy certain accounts were not under the control of the CTA and were excluded from the performance calculation. There were 4 accounts excluded, totaling $429,389, or 39% of assets under management for the ESP in November 2011. The performance range for accounts excluded in November 2011 was -1.75% to -2.39%. Two of these accounts then closed as a result of the MFG bankruptcy. The initial account utilizing the Enhanced S&P Program began trading in July 2009 and is a limited partnership which includes family members and friends of the family that became interested in the trading program through their relationship with Mr. Hu. Performance for this account is considered proprietary under CFTC guidelines.
The accounts included in this table were charged actual fees ranging from 0% to 2% Management fees and 20% to 30% Incentive fees.
