DTI, CTI & FTI Methodologies Marh 2011 Copyright 2011 Alpha Finanial Tehnologies, LLC ( AFT ). All rights reserved. No portion of these materials may be reprodued without the prior written onsent of AFT.
Table of Contents AFT Long/Short Commodity and Finanial Futures Index Family... 3 The AFT Long/Short Commodity and Finanial Futures Indexes... 3 Components & Base Weights... 5 Physial Commodities... 5 Currenies & US Treasuries... 6 Methodology Overview... 6 1. Establish Roll Contrats... 7 2. Gather Component Contrat Settlement Pries... 7 3. Create Setor Returns... 8 4. Determine Setor Long/Short Diretion... 8 5. Adust Setor/Component Weights... 8 6. Produe Portfolio Alloation Report... 8 Index Creation: Tehnial Overview... 10 Gather Pries... 10 Continuous Contrat: Monthly % Return (PDD)... 10 Setor Index Return... 10 Annual Cumulative % Return... 10 Monthly % Return... 11 Setor Index Return... 11 Apply Moving Average to Setor Returns... 11 Diretion Deision: Weighted Moving Average... 11 Setor Monthly Rebalaning... 12 Monthly Multi-Component Setor Weighting... 12 Continuous Contrat: Monthly % Return (Roll Date)... 13 Component Return: Annual % Return (Roll Date)... 13 Setor Index Return: Annual Cumulative % Return (Roll Date)... 13 Component Weights (Annual Roll Date)... 13 Component Weights (Intra-year Roll Date)... 14 Index Calulation... 14 Calulation of Prie Return... 14 Prie Return... 14 Total Return Calulation... 15 Index Committee... 16 Nominated Committee Members... 16 Index Publiation... 16 Calulation Agent... 16 Bloomberg Quotes... 16 Market Disruption Events... 16 Holidays... 16 Glossary... 17 Certain Risk Fators & Dislosures... 18 Confidential Page 2 of 18
AFT Long/Short Commodity and Finanial Futures Index Family The AFT Long/Short Commodity and Finanial Futures Index Family is omposed of the Diversified Trends Indiator TM (DTI ) and its sub-indexes, the Commodity Trends Indiator TM (CTI ) and Finanial Trends Indiator TM (FTI ) (eah an Index and olletively the Indexes ). This paper will provide an overview of the Indexes and detail the alulation method of repliating the DTI. As the only differene between the DTI and its sub- indexes, the CTI and FTI, are the relative weights of their holdings, the methodology equally applies to all three Index alulations. The DTI is the parent index to both the CTI and FTI. It holds ommodity futures, urreny futures and US Treasury futures. The hart below provides an overview of these holdings. Index Components are aggregated into Setors. Eah month on the Roll Date the Indexes undergo a roll proess that will: Rebalane the Setor weights to their base weights o Rebalane Component weights within Multi-Component Setors only on the roll at the last trading day of the year Determine a long/short (flat for Energy) diretion for eah Setor based on a trend-following weighted moving average methodology Roll maturing futures ontrats to longer-dated ontrats prior to their expiration Eah of these proesses is integral to the uniqueness of the returns offered by the Indexes. The Component and Setor delineation allow for the resetting and rebalaning on the Setor level on a monthly basis, while allowing underlying Components to float relative to eah other until year-end at whih time they are reset and rebalaned to their base weights. Components within the Setors also maintain the same long/short/flat diretion during the month so the movements of like Components an follow larger trends in their respetive markets; there are no intra month position adustments. Finally, the fixed ontrat roll method allows repliation without dealing with maturing ontrats. A ritial point in the onstrution of the DTI and CTI is the treatment of the Energy Setor. Due to the signifiant level of ontinuous onsumption, limited reserves, and oil artel ontrols it is subet to rapid prie inreases in the event of pereived or atual shortages. While all other Setors are allowed to be held short, Energy may not. If the trend following methodology alls for a short position in the Energy Setor, the Setor maintains a neutral or flat holding and the weight of the Energy Setor is alloated to the other Setors. This is a forward looking rule to prevent the risk of ruin of the investment. The AFT Long/Short Commodity and Finanial Futures Indexes Developed by Alpha Finanial Tehnologies, LLC, the DTI is a long/short rules-based investable finanial produt. It is designed with the potential to apture the eonomi benefit derived from fundamental events that reates both Confidential Page 3 of 18
rising and delining trends 1. Composed of unleveraged positions in U.S. exhange-traded futures ontrats on 16 different tangible ommodities, suh as light rude oil and gold, as well as futures ontrats on 8 different finanials, suh as maor urrenies and U.S. Treasury bonds, the DTI seeks to differentiate itself from other indexes, trading methodologies and strategies. The DTI s sub-indexes, the CTI and FTI, follow the same methodology as the DTI with the only differene between suh Indexes being their Component weightings (the CTI and FTI are omposed of 16 different tangible ommodities and 8 different finanials, respetively.) The Indexes are based on futures ontrat pries, not ash market pries. These pries may differ from the ash pries of speifi ommodities. Importantly, the Indexes are not long-only, but manage long or short exposures based on a rules-based, trend-following methodology. The DTI repliates a diversified portfolio of futures ontrats (Components) formed into Setors that are designed to reflet and trak prie trends. Exposure is divided equally 50/50 between tangible ommodities (CTI ) and FX, US Treasury Notes/Bonds (FTI ) in order to seek to inrease the internal non-orrelation among the Components and to add liquidity to repliating portfolios. Components of the Setors are hosen based on fundamental harateristis and liquidity. Systemati rules are employed to establish a long or short Component position (with the exeption of the Energy Setor, whih is either long or flat, but never short). Setors are rebalaned monthly; Components are rebalaned annually. The Chart below indiates the DTI s urrent Components and Component base weightings as of the beginning of eah year (assuming the Energy Setor is long). 1 There an be no assurane that the DTI or its sub-indexes will ahieve their obetive or that losses will be avoided. Confidential Page 4 of 18
Components & Base Weights DTI CTI FTI Component Setor Base Weight Energy Flat Base Weight Energy Flat Base Weight Natural Gas 4.25% 0.00% 8.50% 0.00% Crude Light 8.50% 0.00% 17.00% 0.00% Energy RBOB Gas 3.00% 0.00% 6.00% 0.00% Heating Oil 3.00% 0.00% 6.00% 0.00% Live Cattle 3.00% 3.69% 6.00% 9.60% Livestok Lean Hogs 2.00% 2.46% 4.00% 6.40% Wheat 2.50% 3.08% 5.00% 8.00% Corn Grains 4.00% 4.92% 8.00% 12.80% Soybeans 5.00% 6.15% 10.00% 16.00% Copper Industrial Metals 5.00% 6.15% 10.00% 16.00% Gold Preious 3.50% 4.31% 7.00% 11.20% Silver Metals 1.75% 2.15% 3.50% 5.60% Sugar Sugar 1.00% 1.23% 2.00% 3.20% Cotton Cotton 1.00% 1.23% 2.00% 3.20% Cooa Cooa 1.00% 1.23% 2.00% 3.20% Coffee Coffee 1.50% 1.85% 3.00% 4.80% J Yen JPY 12.00% 14.77% 24.00% Brit Pound GBP 5.00% 6.15% 10.00% Swiss Fran CHF 2.00% 2.46% 4.00% Aussie $ AUD 2.00% 2.46% 4.00% Canadian$ CAD 1.00% 1.23% 2.00% Euro EUR 13.00% 16.00% 26.00% US T-Bond Bonds 7.50% 9.23% 15.00% US 10 Yr Notes 7.50% 9.23% 15.00% The DTI holds ombinations of 24 Components aggregated into 17 Setors (while the CTI holds ombinations of 16 Components aggregated into 9 Setors and the FTI holds ombinations of 8 Components eah onsidered a separate Setor). Components are aggregated into Setors where there is a strong relationship between them. For example, Gold and Silver make up the Preious Metals Setor. Components that are part of a multi-component Setor are held in the same long/short diretion (with the exeption of the long/flat positioning of the Energy Setor). The futures ontrats are spread aross Physial Commodities, Global Currenies and US Treasuries. 50% of the DTI is alloated to Physial Commodities (CTI ); the remaining 50% is alloated to Global Currenies and US Treasuries (FTI ). The mix of the two asset lasses reates internal diversifiation within the DTI as our internal researh has shown that the ommodity side and finanial side are not orrelated. To arrive at the Setor weightings when Energy is flat, divide the Setor base weight by one minus the Energy Setor base weight (x/(1-0.1875)). The weighting sheme of the Indexes is fixed. Physial Commodities The ommodity portion of the DTI is based on, but not exatly proportional to, historial prodution figures. As a result, the Energy Setor (18.75% in the DTI ; 37.5% in the CTI ) reeives the largest portion on the ommodity Confidential Page 5 of 18
side, whih is logial. Energy, as measured by its prodution, is more signifiant to the global eonomy than Softs (4.50% in the DTI ; 9% CTI eah assuming Energy Setor is positioned long) and this is refleted in the weighting alloations. Physial Commodities will represent 50% of the DTI when Energy is positioned long and 38.46% when Energy is positioned flat. Correlated Components are grouped into Setors in an attempt to avoid false trading signals (whipsaw markets: prie trends that reverse quikly). This Setor proess helps to reate a more onsistent and robust return stream. As an example, Gold and Silver are orrelated and grouped together to form the Preious Metals Setor, whih has a weighting of 5.25% in the DTI (10.5% in the CTI ) when Energy is long. Eah month, the Preious Metals Setor will be positioned either long or short depending upon the signal generated from the trading model. This means that both Gold and Silver will always have the same position; one an never be long when the other is short. Soft ommodities (Sugar, Cotton, Cooa, and Coffee) are Setors in and of themselves. As an example, the Coffee Setor is simply the Coffee Component. Eah month, Coffee will be positioned either long or short depending upon the signal generated from the methodology. Currenies & US Treasuries The DTI s urrenies and US Treasuries weightings are based on, but not diretly proportional to, historial Gross Domesti Produt (GDP) data. Therefore, the larger eonomi regions should get a higher weighting (e.g. Euro is 13% in the DTI (26% in the FTI ) while the Aussie Dollar is 2.00% in the DTI (4% in the FTI )). Finanials will represent 50% of the DTI when Energy is positioned long and 61.54% when Energy is positioned flat. These Components are Setors in and of themselves. As an example, the Euro Setor is simply the Euro Component. Eah month, the Euro will be positioned either long or short depending upon the signal generated from the Index methodology. Methodology Overview PDD: Prie Determination Date RD: Roll Date or End of Month Confidential Page 6 of 18
1. Establish Roll Contrats The urrent holdings of the Indexes are based on the ontrat Roll Shedule. The Indexes will roll out of ontrats prior to their maturity aording to this fixed table. AFT has limited the investment universe for the Indexes to US exhange-listed futures ontrats mainly due to the fat that futures ontrats have a daily settlement value whereby forwards ontrats (i.e. OTC FX forwards) do not. The existene of a daily settlement prie is essential for the purposes of obtaining aurate historial data and reating reliable pro-forma results. The Roll Shedule is fixed. Roll Shedule Component Contrat JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Natural Gas NG H M M M U U U Z Z Z H H Crude Light CL H M M M U U U Z Z Z H H RBOB Gas XB H M M M U U U Z Z Z H H Heating Oil HO H M M M U U U Z Z Z H H Live Cattle LC M M M M Q Q Z Z Z Z G G Lean Hogs LH M M M M Q Q Z Z Z Z G G Wheat W H N N N N U U Z Z Z H H Corn C H N N N N U U Z Z Z H H Soybeans S H N N N N X X X X H H H Copper HG H K K N N U U Z Z Z H H Gold GC J J M M Q Q Z Z Z Z G G Silver SI H N N N N U U Z Z Z H H Sugar SB H K K N N V V V H H H H Cotton CT H N N N N Z Z Z Z Z H H Cooa CC H N N N N U U Z Z Z H H Coffee KC H N N N N U U Z Z Z H H J Yen JY H H M M M U U U Z Z Z H Brit Pound BP H H M M M U U U Z Z Z H Swiss Fran SF H H M M M U U U Z Z Z H Aussie $ AD H H M M M U U U Z Z Z H Canadian$ CD H H M M M U U U Z Z Z H Euro EC H H M M M U U U Z Z Z H T-Bond US H M M M U U U Z Z Z H H 10 Yr Note TY H M M M U U U Z Z Z H H Contrat Month Codes JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC F G H J K M N Q U V X Z The ontrat expiration appliable to Natural Gas in Marh (from but exluding the Rollover Date in February to and inluding the Roll Date in Marh) is the June ontrat. 2. Gather Component Contrat Settlement Pries Two settlement pries for eah Component ontrat are used in the alulation of the final Indexes. Confidential Page 7 of 18
PDD Pries: Pries are gathered on the Position Determination Date, the 2 nd to last trading day of the month, to reate monthly perentage hange time series for eah Setor (PDD prie ompared with PDD prie from the month before). The time series for eah Setor are then ompared with their respetive moving averages and the diretion deision an be made for eah Setor. RD Prie: Settlement pries are gathered on the Roll Date (RD), the last trading day of the month. The returns (RD Prie for urrent Month ompared with RD prie from the prior month) are used to fix the weights of Components within multi-component Setors. 3. Create Setor Returns The moving average algorithm is applied to the Setor level return history data. This is not a spot value omparison of a single ontrat but the running total perentage hange from ineption of the Setor. The Setor valuation is a ontinuous ontrat that inorporates priing from individual ontrats following the Roll Shedule. The perentage hange value is built from the PDD Priing (settlement value on PDD of urrent month ompared with the settlement value on the PDD from the month prior) for eah Component within a Setor. 4. Determine Setor Long/Short Diretion The Indexes establish long or short positions one a month using a transparent, rules-based positioning proess. All of the Setors within the Indexes are positioned either long or short at eah month-end (exept Energy, whih is positioned long or flat/neutral). Long or short positions are always taken on the Setor level. As an example, the Preious Metals Setor has a weighting of 5.25% in the DTI (when Energy is long). Eah month depending upon the signal generated from the trading model, Preious Metals will be positioned either 5.25% Long or 5.25% Short in the DTI (when Energy is long). There is no relative strength sreen or adustment. The Energy Setor is either held long or flat (no exposure) in the DTI and CTI. The diretion deision is the same as other Setors but a flat position replaes potential short exposure. If the Energy Setor is to be held flat on the Roll, the exposure is distributed on a pro-rata basis to all other Setors (and their Components). 5. Adust Setor/Component Weights Setors in the DTI and CTI have two base weights, one when the Energy Setor is long and one when the Energy Setor is flat. The Index weights are presented at ineption of suh Indexes. Setor weights are fixed and rebalaned bak to their base weight monthly. Components that are part of a multi- Component Setor (Energy, Livestok, Grains, and Preious Metals) are only reset bak to their base weight within their Setor at the roll at the last trading day of the year. For example (assuming Energy is long), the Japanese Yen (a single Component Setor) and the Grains (a multi- Component Setor) will rebalane to 12.00% and 11.50% of the DTI respetively on the Roll Date. However, the individual Components within the Grains Setor will only rebalane to their base weight at the beginning of the year. During the year they float within the 11.50% DTI Grains weighting. 6. Produe Portfolio Alloation Report The final output of the methodology is the Portfolio Alloation Report (PAR). It ontains the urrent weight, position and alloation of the DTI or its sub-indexes the CTI and FTI. The ompleted PAR aggregates the urrent Index Components (Setor weights, Component weights, Setor diretion) so that the Index may be repliated and valued eah day. Confidential Page 8 of 18
DTI Portfolio Alloation Report SAMPLE Ative Roll Date: Ot 30, 2009 Contrat Position Long=1 Contrat Origination Contrat Name Code Weight Short =-1 Flat=0 Month Prie Wheat W 2.35% -1 Z 457.5 Corn C 4.35% -1 Z 344 Soybeans S 7.46% -1 H 933.5 Crude Oil (Light) CL 0.00% -1 Z 70.94 Heating Oil HO 0.00% -1 Z 1.859 Natural Gas NG 0.00% -1 Z 5.674 Unleaded Gas XB 0.00% -1 Z 1.7653 Lean Hogs LH 1.90% -1 Z 49.6 Live Cattle LC 4.26% -1 Z 86.125 Australian Dollar AD 2.46% 1 Z 0.8774 British Pound BP 6.15% -1 Z 1.6002 Canadian Dollar CD 1.23% 1 Z 0.9364 Japanese Yen JY 14.77% 1 Z 1.1162 Swiss Fran SF 2.46% 1 Z 0.966 Treasury Bond US 9.23% 1 Z 121.375 10 Yr Note TY 9.23% 1 Z 118.328 High Grade Copper HG 6.15% 1 Z 281.9 Gold GC 3.93% 1 Z 1009.3 Silver SI 2.54% 1 Z 1665.8 Cooa CC 1.23% 1 Z 3140 Coffee KC 1.85% -1 Z 127.8 Cotton CT 1.23% 1 Z 62.84 Sugar #11 SB 1.23% 1 H 25.39 Euro EC 16.00% 1 Z 1.4645 Confidential Page 9 of 18
Index Creation: Tehnial Overview Gather Pries 1. Contrat settlement pries are olleted on the Position Determination Date (PDD) and Roll Date (RD). 2. For eah underlying ontrat months the pries reate a monthly % return. Wheat- Contrat Return PDD (2nd LAST day) W-H W-N W-U W-Z JAN 4.24% 4.24% 11.34% 11.60% 0.00% FEB 22.02% 26.72% 22.02% 22.85% 13.95% MAR -5.77% -0.77% -5.77% -6.76% -4.67% APR -18.83% 0.00% -18.83% -17.68% -17.52% MAY -8.04% -30.99% -8.04% -7.77% -7.16% JUN 20.12% 19.39% 20.44% 20.12% 19.78% JUL -13.62% -12.56% -5.81% -13.62% -13.15% AUG -0.18% -0.12% 0.00% 0.16% -0.18% SEP -17.63% -17.46% -15.12% -1.24% -17.63% OCT -19.46% -18.90% -18.19% 0.00% -19.46% NOV -0.85% -0.85% -0.77% -22.55% -0.46% DEC 9.16% 9.16% 8.17% 7.46% 1.31% JAN -4.42% -4.42% -4.14% -3.51% 0.00% Sample Roll Shedule: Wheat JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC H N N N N U U Z Z Z H H 3. Create two time series based on monthly perentage hange figures for eah of the PDD Pries and RD Pries. The example above is a Continuous Contrat for Wheat. Note that the Roll Shedule is used to selet returns to build this history. Continuous Contrat: Monthly % Return (PDD) SetP ( PDD) MR ( PDD) 1 SetP ( PDD1) PDD: Position Determination Date; 2 nd last trading day of the month MR(PDD): Monthly Return on the Position Determination Date of Component. SetP(PDD): the Settlement Prie of the Roll Contrat (see Roll Shedule) on the PDD of the Index Component. SetP(PDD-1): the Settlement Prie of the Roll Contrat (see Roll Shedule) of Component on the PDD immediately preeding the PDD. Setor Index Return Annual Cumulative % Return Where the Setor is a single-component Setor (i.e. Industrial Metals and eah Finanial Component), the PDD and RD Continuous Contrats shall be used defined as the Setor Return for determining monthly diretion (long/short). Setor returns on the PDD are built on Component Returns and Component s base weights within Setors: Confidential Page 10 of 18
SCR n( ) 1 ( PDD) n( ) w (0) CR ( PDD) 1 w (0) SCR(PDD): The Setor Cumulative Return on the PDD of Setor. w(0): The Component base weight CR(PDD): the Cumulative Return on the PDD of the Index Component. n(): means the number of Index Components omprising the Setor. : The Component. Monthly % Return On the PDD in January of eah year the annual perentage return resets: Otherwise: SMR ( PDD ) SCR ( PDD ) 1 SCR ( PDD) SMR ( PDD) 1 1 SCR ( PDD 1) SMR(PDD): the Monthly Return on the PDD of Setor SCR(PDD): the Cumulative Return on the PDD of the Setor. SCR(PDD-1): the Cumulative Return of the Setor on the PDD immediately preeding the PDD. Setor Index Return The Setor Index Return is an input into the Setor Weighted Moving Average formula: 1 SIR ( PDD 1) 1 SMR ( PDD) 1 SIR ( PDD) SIR(PDD): The Setor Index Return on the PDD for Setor SIR(PDD-1): The Setor Index Return for Setor on the PDD immediately preeding the PDD. SMR(PDD): the Monthly Return on the PDD of Setor Apply Moving Average to Setor Returns The Setor returns (based on PDD Continuous Contrats) are ompared with their weighted moving average (giving higher weights to more reent values). This is demonstrated graphially in the hart below. The long/short (Energy Setor is long or flat but never short) deision is based on the rule that if the Setor monthly return is plotted below its moving average, the Setor is held short the following month. If the Setor is plotted above its moving average it is held long. All Components within a Setor are held in the same diretion. Diretion Deision: Weighted Moving Average The Indexes use a Weighted Moving Average (WMA) to determine whether to hold a Setor long or short (Energy Setor is long or flat but never short) during the month. All Setors maintain the same WMA inputs: Number of months: 7 Weighting multiplier: 1.6 Confidential Page 11 of 18
The WMA for Setor is defined as: WMA 1 6 * 43.072575 n0 1.6 * SIR ( PDD) The WMA is then ompared with the Setor Index Return for Setor (SIR ) to determine whether the Setor will be held long (1), short (-1) or flat (0) after the roll. This is the Long Short Neutral Diretion (LSND). All Components of the Setor will maintain the same diretion for the month. 1 if SIR WMA LSND 1 if SIR WMA where Setor Energy 0 if SIR WMA where Setor Energy 50% Setor Return vs. Setor WMA Perentage Return 45% 40% 35% 30% 25% 20% 15% 10% Setor Return Setor WMA 13 12 11 10 9 8 7 6 5 4 3 2 1 Prior Monthy Observations Setor Monthly Rebalaning Eah month-end Roll will reset the urrent Setor weight bak to its base weight. During the month the relative weights of the Setors will hange due to performane of the underlying Components. sw ( RD ) sw (0) If LSND for the Energy Setor = 0 sw (0) sw ( RD) 1 swenergy(0) sw(rd): The weight of Setor on the Roll Date sw(0): The base weight, of Setor swenergy(0): The base weight of the Energy Setor Monthly Multi-Component Setor Weighting Eah month all Setors rebalane to their base weights. The Components within Multi-Component Setors (the Grains, Livestok, Energy, and Preious Metals) only rebalane to their base weights at the last Roll Date of the year. During the year these Component weights flutuate within their Setors. Confidential Page 12 of 18
Component valuations on the Roll Date (RD), the RD Pries, determine the weights of eah Component within the Grains, Livestok, Energy, and Preious Metals Setors. This proess is similar to the values taken on the PDD, the PD Pries, for LSND determination. Multi-Component Setors will use the individual Component returns to reate a Setor Return. Continuous Contrat: Monthly % Return (Roll Date) SetP ( RD) MR ( RD) 1 SetP ( RD 1) RD: Roll Date; the last trading day of the month MR(RD): the Monthly Return on the Roll Date of Index Component. SetP(RD): the Settlement Prie of the Roll Contrat (see roll shedule) on the RD of Component. SetP(RD-1): the Settlement Prie of the Roll Contrat (see roll shedule) of Component on the RD immediately preeding the RD. Component Return: Annual % Return (Roll Date) On the RD in January of eah year the annual perentage return resets: Otherwise, CR ( RD) MR ( RD) 1 CR ( RD 1) 1 MR ( RD) 1 CR ( RD) CR(RD) the Cumulative Return on the RD of Component. MR(RD) the Monthly Return on the RD of Component. CR(RD-1) the Cumulative Return of Component on the RD immediately preeding the RD. Setor Index Return: Annual Cumulative % Return (Roll Date) Setor returns on the RD are built on Component Returns and eah Component s base weight within Setors: SCR n( ) w (0) CR 1 ( RD) n( ) 1 w (0) ( RD) SCR(RD): The Setor Cumulative Return on the RD of Setor. w(0): The Component base weight CR(RD): the Cumulative Return on the RD of Component. n(): means the number of Index Components omprising the Setor. : The Component. Component Weights (Annual Roll Date) Eah year-end Roll on the Roll Date in Deember will reset the urrent Setor weight bak to its base weight for January. This is modified if the Energy Setor is flat. The Weights of Components within Multi-Component Setors for the annual roll will be: w RD) w (0) ( Confidential Page 13 of 18
If LSND for the Energy Setor = 0 w ( RD) w 1 sw (0) Energy (0) w(rd): The weight of Component on the Roll Date w(0): The Component base weight swenergy(0): The base weight of the Energy Setor Component Weights (Intra-year Roll Date) During the year Component weights within Multi-Component Setors are allowed to float aording to the following formula: w ( RD ) LSNP i Energy 1 LSND ( PDD ) w (0) Energy 1 ( PDD) 1 sw i 1 CR ( RD ) 1 SCR ( RD ) Energy 1 CR ( RD) wi (0) (0) 1 SCR ( RD) LSND Energy (PDD): Long, Short or Neutral Diretion for the Energy Setor. This value is determined on the PDD preeding the RD and is either a 1(long) or 0(flat) for the Energy Setor. w (0): The Component base weight CR (RD): the Cumulative Return on the RD of the Index Component. SCR (RD): The Setor Cumulative Return on the RD of Setor. sw Energy (0): The Setor base weight for the Energy Setor. Index Calulation Index values are alulated daily after the lose of the underlying Component markets. Eah futures exhange will publish a settlement value for eah Component and these pries reate a daily P/L for the Index. Valuing the Indexes requires settlement pries for the speifi ontrat maturities detailed in the PAR. Calulation of Prie Return One data point on the PAR is a theoretial number of ontrats held to repliate the Indexes presuming an unleveraged portfolio size of ten million US Dollars. These ontrats are unrounded and may serve as the basis for a daily Index return. Eah day the settlement value for the ontrats held in the theoretial portfolio should be ompared with the settlement prie of the ontrats in the PAR. This prie move, the diretion and the ontrat multiplier (all on the PAR) will determine a daily Component P/L that an be summed to understand the performane of the $10MM portfolio. The dollar appreiation an be ompared to the beginning of month level to determine a daily perentage hange in the Index level. Prie Return Eah trading day the Indexes will be valued based on the settlement pries of their respetive Component ontrats. The Prie Return is a sum of the ontrat perentage hanges that does not inlude any interest omponent. Confidential Page 14 of 18
DTIPR( t) DTIPR( RD) 1 Z 1 LSND ( RD) w SetP ( t) ( RD) 1 SetP ( RD) DTIPR(t): The value of the DTI PR on day t DTIPR(RD): The value of the DTI PR on the Roll Date preeding day t t: the urrent Trading day LSND (RD): The Long Short Neutral Diretion of the Component C. This value is either a 1, -1, or 0. w (RD): The weight of Component on the Roll Date SetP (t): The settlement prie of Component on day t SetP (RD): The settlement prie of Component on the Roll Date Note that positions roll at the lose of business on the Roll Date. Index valuations on the Roll Date (t=rd) will refer to the prior Roll Date for Component pries, diretion, and weights. Total Return Calulation The Total Return of eah Index simulates the returns of implementing suh AFT Index in a futures trading aount. The interest return on futures ollateral is represented by the yield of a three month US Treasury Bill ontrat that is rolled quarterly. The daily yield is added to the Index returns and, on the Roll, the interest is invested in the Index resulting in a ompounding effet. An example of the DTI Total Return Calulation is as follows: At the Index ineption the DTI Total Return (DTITR) base value is 1000: DTITR(0)=1000 On a given trading day t : For any time t (t > RD): DTITR(t) = I(t) + R(t) DTIPR( t) DTIPR( RD) I ( t) DTITR( RD) 1 DTIPR( RD) I(t): The value of the DTI without the most reent quarterly impat of the interest rate omponent on trading day t DTITR(RD): The value of the DTI Total Return on the Roll Date (RD) prior to day t DTIPR(RD): The value of the DTI PR on the Roll Date preeding day t Note that positions roll at the lose of business on the Roll Date at their settlement pries. Index valuations on the Roll Date (t=rd) will refer to the prior Roll Date for Component pries, diretion, and weights. The Interest Rate (R(t)) is reinvested in the Index on the quarterly Roll Date and alulated as: R( t) DTITR( RD) t trd1 rate( t R(t): The value of the interest rate omponent on day t 1 ( t t 1) ) 360 Confidential Page 15 of 18
DTITR(RD): The value of the DTI Total Return on the Roll Date (RD) prior to day t RD: The Roll Date prior to day t t -1 : The trading day immediately preeding day t rate(t -1 ): The US 3-Month T-Bill rate at aution as published on Bloomberg page GB3 <Govt> Index Committee In order to provide for the smooth funtioning of the Indexes, the Index Committee will make any deisions that annot be systematized or that our on an ad ho basis. The Index Committee will implement established methodology or determine new poliy if market onditions warrant hange. The Index Committee does not, however, use disretion to affet performane. Always, the goal is to maintain liquidity and low volatility in the Index. Nominated Committee Members Vitor Sperandeo Adam Watts Index Publiation Calulation Agent Bloomberg Bloomberg Quotes DTITR DTIPR CTITR CTIPR FTITR FTIPR Market Disruption Events A ommon ourrene is a limit move in one or more of the underlying futures ontrats 2. The Index alulation is indifferent to this as the settlement value of the partiular ontrat will simply be the limit value for that day(s). Repliating the Indexes when a ontrat is Limit an lead to the delay of a roll for that position and potentially slippage with the benhmark Index. Holidays The Indexes follow the New York Stok Exhange (www.nyse.om) holiday alendar. US Futures Exhanges do not disseminate settlement values on these holidays. 2 Some Components of the DTI and CTI may experiene limit moves. The daily limit is a prie band per ontrat that is established by the Component s exhange. The Component is not permitted to trade at a prie above or below the upper/lower limit respetively. The limit move may prohibit a position from being losed during a ontrat roll. Confidential Page 16 of 18
Glossary Component Energy Flat RD or Roll Date RD Pries Long-Short Deision PDD PDD Pries Roll Setor One of the underlying ontrats in the AFT Indexes. A Component may be part of a multi-component Setor (e.g. Wheat is in the Grains Setor) or a single Component Setor (e.g. the Euro ontrat is the only Component of the Euro Setor) If the Energy Setor return is underperforming the moving average return the DTI and CTI will hold no exposure (flat position) to the Setor. Exposure that would normally be alloated to Energy will be distributed to the other Setors. The last trading day of the month. Values reorded on the last day of the month are used to alulate the weight of Components within a multi-component Setor (Grains, Livestok, Energy, and Preious Metals Setors). They also determine the number of ontrats required to align a portfolio with the Index weighting. Eah month eah Setor s performane is ompared to a speified moving average. If a Setor is outperforming the moving average the Setor will be held long for the next roll, if underperforming, the position will be short. Note that Energy is an exeption as it may only be held long or flat. The 2nd to last trading day of the month; the Position Determination Date The PDD returns time series is a omparison of the settlement prie of a Component on the PDD of the prior month to the PDD of the urrent month. The prior day pries are the basis for the Setor time series that reate the moving average. It is the omparison of the PDD time series to the moving average that results in a Long-Short Deision. The PDD Pries are not used to value the Index. Eah roll period during whih the Setor Components and Setors are reweighted, a long-short diretion hange may our, and ontrats may roll from near-month to a longer dated month. A grouping of similar individual Components. The multi-component Setors that are onsidered for alulation purposes are Energy, Livestok, Grains and Preious Metals. Setors are rebalaned on the Roll Date to their base weights but the weights of Components within these Setors are allowed to vary. Confidential Page 17 of 18
Certain Risk Fators & Dislosures This ommuniation is published by Alpha Finanial Tehnologies, LLC ( AFT ). Copyright 2011. The ontent in this ommuniation is the property of AFT and is proteted by opyright and other intelletual property laws. All trade names, servie marks and other produt and servie names in this ommuniation and within the ontent are proprietary to AFT and are proteted by trademark and opyright laws. Any of the trademarks, servie marks or logos (olletively, the Marks ) in this ommuniation may be registered or unregistered marks of AFT. Nothing ontained in this ommuniation should be onstrued as granting any liense or right to use any of the Marks in this ommuniation without the express written permission of AFT. Illegal or unauthorized use of the Marks or any other ontent inluded in this ommuniation is stritly prohibited. This ommuniation does not purport to provide omplete details on the Diversified Trends Indiator, Commodity Trends Indiator, or Finanial Trends Indiator (eah, a Produt ) of AFT, is for information purposes only, and should not be onstrued as investment, legal or tax advie. Neither this ommuniation nor any information ontained herein onstitutes an offer to sell (nor the soliitation of an offer to buy) any seurity. Any suh offer may only be made by a prospetus or similar dislosure doument prepared by the issuer of eah suh seurity, whih ontains important dislosures and risk fators. Investors in a produt based on a Produt, shall solely rely upon suh dislosure doument in making an investment deision. AFT does not provide any form of investment advie and reeives no ompensation from any lient or lients in suh regard. Rather, AFT solely reeives a liense fee from liensees of its Produts. In partiular, AFT does not diret lient aounts or provide ommodity trading advie based on or tailored to the ommodity interests or ash markets or other irumstanes of a partiular lient. No portion of these materials may be reprodued without the prior written onsent of AFT. Investors an not invest diretly in an index suh as the Produt(s). An investment in a produt seeking to repliate the Produt(s) is speulative, involves a substantial degree of risk, and should not onstitute an investor s entire portfolio. Investors ould lose all or substantially all of their investment therein. Some or all alternative investment programs may not be suitable for ertain investors. No assuranes an be made that the Produt(s) will ahieve their investment obetives or that losses will be avoided. The longer-term an investment the greater the likelihood that the performane potential suggested may be realized. Over the short-term, on the other hand, there is a muh greater possibility that the Produt(s) may deline substantially ausing signifiant losses. Among the risk assoiated with the Produt(s) are the following: In ontrast to traditional all long indexes, the Produt(s) take both long and short positions and may not profit from the ylial nature of the futures inluded therein. The Produt(s) is not a proxy for all long ommodities indexes. The Produt(s) are vulnerable to whipsaw markets in whih market movements may ause the bulk of their omponents to be either long or short and then a sudden reversal of prior prie trends ours, ausing losses. The omplexity of the different fators whih ontribute to the results of the Produt(s). The Produt(s) ould deline in a wide range of different market senarios, inluding ones in whih other similar produts (both all long and long/short) rise substantially. The Produt(s) are based on futures, not ash market pries; those pries may differ materially in general as well as for speifi ommodities. Repliation of the Produt(s) involve exeution osts and position slippage whih an be substantial, and may be affeted by, among other things, disruption aused by futures market losures and/or trading prie or volume limitations imposed by one or more futures markets. Furthermore, any fators whih ontribute to trendless (a lak of sustained diretional trends in many markets) have been, and are likely to be, adverse to the Produt(s). Generally speaking, trendless markets (and aompanying whipsaws ) are more likely to our during eonomi environments of very low, stati or delining GDP despite very low interest rates, aompanied by low inflation. The length of time for whih suh market onditions have persisted -- for most of 2009 and 2010 is unique in the United States in the last 50 years. No representation is being made that a Produt will or is likely to ahieve performane onsistent with or similar to that set forth in this ommuniation. Similarly, no representation is being made that any produt seeking to repliate the Produt(s) will generate profits or losses similar to the historially performane of the Produt(s). There are numerous fators related to the markets in general and to the implementation of any produt seeking to repliate the Produt(s) whih annot be, and have not been, aounted for in the preparation of the information on the Produt(s) set forth in this ommuniation, all of whih an adversely affet atual performane results for any produt seeking to repliate the Produt(s). While reasonable efforts have been used to obtain information from reliable soures and in the alulation of the data herein, no representations or warranties are made as to the auray, reliability or ompleteness of any information ontained herein. All data and information provided herein is subet to hange without notie. AFT makes no express or implied representation or warranties as to (a) the advisability of purhasing or assuming any risk in onnetion with any transation related to the Produt(s); (b) the results to be obtained by the issuer of any seurity or any ounterparty or any suh issuer s seurity holders or ustomers or any suh ounterparty s ustomers or ounterparties or any other person or entity from the use of the Produt(s) or any data inluded in this ommuniation; or () any other matter. AFT makes no express or implied representation or warranties of merhantability or fitness for a partiular purpose with respet to the Produt(s) or any data inluded in this ommuniation. Without limiting the foregoing, in no event shall AFT have any liability (whether in negligene or otherwise) to any person for any diret, indiret, speial, punitive, onsequential or any other damages (inluding lost profits) even if notified of the possibility of suh damages. Confidential Page 18 of 18