Di Tomasso Group Inc. : Equilibrium Program

Summary

The Equilibrium Program invests in publicly listed commodity futures contracts and options contracts that are restricted to physical commodities such as grains, meats, metals, energy products and “softs”. The Program is characterized by a long term, buy and hold, low turn-over, reversion-to-the-mean style that sets it apart.

Investment Strategy

Our Equilibrium Program is characterized by three key features: (1) Fundamental research – We scour the world for supply and demand information pertinent to our commodity candidates. Investments are made when the supply/demand balance favours taking a particular position, either long or short. (2) Using selected data covering the past 50 year period, we calculate the current intrinsic value of each major tradable commodity identifying those commodities which are the most under-valued or over-valued. It is presumed that the price of each commodity will eventually revert to its historic mean. (3) The implementation of a sound trading strategy which enables our central models to translate the mispricing of these commodities into profits by: (i) utilising proprietary option valuation models to determine which option strike price and which option expiry month best satisfies its stringent risk-reward requirements; (ii) disciplined execution which minimizes option premium decay and slippage; and, of paramount importance... (iii) the imposition of a rigorous risk control and management program which ensures that downside risk is reasonably modest at all times – our ongoing re-balancing process is designed to keep an account’s Value at Risk and degree of leverage relatively constant even in volatile markets.

Risk Management

Risk is commonly defined as the likelihood of permanent loss of invested capital, not as a measure of volatility. Modern Portfolio Theory has popularized the notion that risk can be measured in terms of price fluctuations - by that standard, a commodity that suffers a price decline to a historically low level would be considered "highly risky". We view such logic as inherently flawed. Rather, whenever a commodity trades close to its extreme historical price, we see that as an investment opportunity rather than a risk. The risk, in our view, is that a commodity position, once taken, might remain "offside" for an extended period. Our style incorporates a risk management program designed to reduce the risk of loss of invested capital. Measures taken as part of this program include, but are not limited to: (1) the allocation and maintenance of sufficient cash reserves to meet any anticipated margin calls, even below a level that, by historical measures, would be called a “worst case scenario”; (2) diversification of the Program’s positions among several commodities with representation from various commodity groups; (3) purchase, where appropriate, option contracts to replace existing futures or forward contract positions or in lieu of the purchase of futures or forward contracts; (4) a policy of not engaging in pyramiding its commodities positions (i.e. the use of unrealised profits on existing positions to provide margin for the acquisition of additional positions in the same or a related commodity); and (5) our rebalancing process is designed to limit the over-all risk exposure of an account. “Over-all risk exposure” means the sum of: (i) the total potential loss incurred in the event that the underlying value of account’s forward and futures contract positions fall to their inflation-adjusted historic lows; (ii) the total loss of value of all option contract positions held, and (iii) all those losses occurring simultaneously.