Midwest Trading Partners, LLC : Micro-Arbitrage Program (MAP)

Summary

The Micro Arbitrage Program (MAP) has been the flagship trading program of Midwest Trading Partners since its inception in 2005. The primary objectives of the program are capital preservation, equity index returns, bond index volatility and non correlation to other asset classes. The combination of methodology, risk adjusted performance, correlation, and margin used are unique in the managed futures space.

Investment Strategy

The MAP is a discretionary trading program focused on U.S. short term interest rate (STIR) futures. The MAP does not attempt to predict or profit from directional price movements and is managed on a “delta neutral” basis. Returns are achieved by capturing spread price dislocations that are a regular occurrence in the STIR markets due in part to institutional hedging, directional trader activity, and changes in monetary policy. Midwest’s “competitive edge”, lies in the fact that it is uniquely positioned in size and sophistication to take advantage of these dislocations. Because most of these dislocations are not large, major financial institutions tend not to commit resources. Likewise, smaller hedge funds, CTA’s, and proprietary traders are generally not focused on relative value strategies. Return opportunities for the MAP are mainly a function of low credit spread volatility and normal to above normal interest rate volatility. Likewise, drawdowns tend to be a result of a lack of trading opportunities rather than strings of unprofitable trades. We believe that our trading style and competitive edge uniquely position the Micro Arbitrage Program to produce excellent risk adjusted returns over the coming years as interest rates normalize and hedging and trading activity increases. Performance Notes: Performance shown is net of all fees that would have applied at that time. AUM data are managed accounts only, no proprietary AUM is included. From 2006 through 2010 a majority of managed accounts elected to hold their nominal account size constant on a monthly basis. As a result, the NFA requires that the annual return be computed by summing the monthly returns and not compounding them. Because Midwest does not calculate returns shown here, the YTD returns shown here are compounded. As a result of the July 2012 Peregrine Financial bankruptcy proceeding and related actions, client managed accounts were not fully under the control of Midwest Trading Partners and therefore were excluded in whole from the monthly performance calculation.

Risk Management

No program can be without risk, and the MAP is no exception. Historically the Partners have committed a significant portion of their net wealth to the program and therefore also have “skin in the game”. Risk for the MAP is monitored on a portfolio level. This includes but is not limited to market directional, curve, and credit spread risk. Midwest makes every effort to remain market neutral with respect to directional price exposure. Our model calculates our directional exposure first into maturity buckets, and then into total exposure. This allows us to mitigate as much curve and directional risk as possible. Our largest potential exposure is credit spread risk. This is the risk that the normal “credit spread” between two contracts makes an adverse move to the position. This risk is also monitored on a portfolio basis and is mitigated when the exposure exceeds predetermined levels (approx. 2%). Our commitment to risk control is evident in the low levels of drawdown incurred by the program.