Boston & Zechiel Management, LLC : Annual Cycle Trading Strategy - Aggressive Variant (P)

Summary

The overall goal of each of the Boston & Zechiel Management (BZM) trading programs offered in this presentation is to achieve account appreciation through the use of an on exchange futures investment strategy.

BZM’s objective will be to obtain, relatively high risk-adjusted returns while striving to protect investor capital under management against adverse market trends.

In order to attract a variety of potential clients BZM has decided to provide the strategy in two forms; a conservative account format (“Conservative Variant”) and an aggressive account format (“Aggressive Variant”). Each of these strategies will be referred to as the “Annual Cycle Trading Strategy” (“ACTS”) as there is no material strategy difference between them. The difference between the programs is largely related to the amount of leverage utilized and not the actual trading methodologies.

The Annual Cycle Trading Strategy (“ACTS”) was developed to capitalize on the financial market’s seasonal tendencies. ACTS attempts to do this by trading S&P 500 or Dow Jones Industrial Index Futures to achieve a leveraged ratio on the broader S&P 500 or Dow Jones Industrial Index. Positions are held for periods of time that may vary from one day to several months based on market cycles. In the event market conditions do not appear to be favorable for trading, the ACTS system will not generate any trade signals. As a result, the assets of your account may also remain dormant at your respective FCM for extended periods of time.

The Annual Cycle Trading Strategy rules are clearly defined and strictly adhered to no matter what the market environment may be at the time.

Investment Strategy

Our trading philosophy begins with the premise that annual cycles within stock markets exist and can be capitalized on.

In very general terms, we believe it takes 12 months to complete one annual cycle. The ACTS trading strategy therefore seeks to follow and establish a leveraged “Long Only” position. Our long only positions are taken only within the stock index futures markets in an attempt to take advantage of these perceived financial cycles. ACTS goal over time will be to take advantage of the expected ‘up’ portion of the annual cycle. To do this, ACTS will rollover the quarterly futures contracts until the ‘down’ portion of the annual cycle is expected to begin. At this point we will attempt to exit our long only positions and exit any trend we have been trading.

During the expected ‘down’ portion of the annual cycle, clients trading ACTS will likely hold no positions within their accounts until the next ‘up’ portion is expected to begin.

There is one exception to this rule, however; ACTS will enter a partial long position before the ‘up’ portion of a market cycle is expected to begin if it is perceived that stock index prices have dropped to specific internally determined levels since the exiting of the previous long position. If this occurs, ACTS will increase the partial position to a full position if index futures prices continue to drop low enough.

The aggressive version of the ACTS program is materially similar to the conservative program described in the previous slide. The only differences between the Conservative Variant program and the Aggressive Variant program of ACTS are as follows:

1. The aggressive strategy will at times use double leverage. In other words client account equity ratios will be as much as two times higher than the conservative variant.

2. The aggressive variant will attempt to take advantage of the expected ebb and flow of prices. In other words, it will not purely trade large annual cycles as the conservative variant intends to do. Trading decisions will be made in a materially similar fashion, however; the time frame evaluated when attempting to observe market cycles will be shortened. As a result of evaluating shorter market cycle periods more frequent trading will occur within the aggressive strategy.

3. Recall that ACTS uses “Long Only” positions.

A) With the aggressive variant in the event market prices move downward, BZM will increase the long position held within your account.

B) Generally the conservative variant of the program will hold trades throughout the duration of an established cycle period. With the aggressive version of the strategy, if prices increase to predetermined levels BZM will exit a portion of the trade in an attempt to capture additional profits.

C) Similarly, the aggressive variant does not have restrictions on when or if the entire position is exited. As such, trades may be entered during the ‘up’ portion of the annual cycle, closed, and re-entered for the purpose of possibly identifying sub cycles within the same ‘up’ period.

Risk Management

Boston & Zechiel Management employs a two prong approach to Risk Management.

Our first line of defense for both the Aggressive and Conservative variant of the Annual Cycle Trading Strategey is to greatly minimize market risk by establishing long positions when the upward cycle has started. Historically this strategy has allowed investors to avoid all but a few of the serious equity sell offs in the past 90 years.

Our second line of defense consists of an options hedging strategy. While holding a long position of index futures, the Annual Cycle Trading Strategey employs a hedging strategy through the purchase of deep-out-of-the-money put option contracts and/or option collars on the underlying futures held. Our intended purpose for hedging within the ACTS strategy is to limit the opportunity for catastrophic losses. It is our opinion that these deep out of the money options for their cost are an effective risk control. Specifically, because positions within the ACTS strategy may be held for a long period of time; these options may help to protect against extreme volatility. The positions will not, however; provide significant relief to the regular ebb and flow of draw downs which are to be expected in any longer term strategy.

Aggressive Variant – Uncharacteristic Performance in January 2009 and February 2009

The poor performance of our Aggressive Variant in January and February 2009 was due to a lack of a safety net (second line of defense) with overleveraged positions during the historically bad sell off of the equity cash markets. As a result we have adjusted our trading strategy by reducing leverage in our long positions and utilizing put options to provide a safety net that would minimize deep draw downs should a "once-in-a-lifetime" selloff occur during the upward period of the annual cycle. Since World War II, when the upward period of the annual cycle begins; draw downs in the stock market have been less than 13%. However, the 2008/2009 cycle experienced a 29% drop in price (only the 4th time over 20% and the first time since 1937) and exposed a serious hole in our risk management approach, thus the second line of defense was developed. This error has been fixed going forward.

The Aggressive Variant also reduced its initial leverage by 33% when entering long only positions for the Annual Cycle Trading Strategy.

The Conservative Variant of the Annual Cycle Trading Strategy was also developed because of this outlying event to appeal to potential investors who are adverse to this type of volatility.