Wavefront Global Asset Management : IMFC Global Investment Program

Summary

-The IMFC Global Investment Program invests in a globally diversified portfolio of futures, options and forward contracts, swaps and other financial derivative instruments giving investors exposure to a broadly based portfolio of both long and short investments in agricultural and soft commodities, metals, energies, currencies, interest rates and equity indices.

Investment Strategy

The central investment tenet of the IMFC Global Investment Program is that markets exhibit serial correlation or price trends and other persistent anomalies that cannot be explained by random behavior or the assumption of fully informed and rational market participants. Price trends, or serial correlation in market prices, may be the result of many factors including deeply rooted supply and demand trends for physical commodities, equity risk premiums, persistent interest rate differentials between currencies, the basis embedded in the term structure of futures prices and the crowd behavior of market participants.The IMFC Global Investment Program IMFC utilizes proprietary systematic trading strategies to invest in long-term price trends in over 60 industrial, agricultural and financial futures markets. The average duration of profitable trades is approximately one year, though they often last anywhere from two to five years with losses cut quickly when they occur. IMFC’s strategies utilize multiple non-correlated signal generators applied across several long-term timeframes of market data. The effect of this diversification is a reduction of position sizes in markets at equilibrium often to the point of having no exposure to those markets, and increased position sizes in markets that are exhibiting extreme price swings. Proprietary smoothing techniques are also used to separate underlying trend-persistence from random market noise, resulting in continuous exposure to long-term market trends of one year or longer.In addition, IMFC’s strategies incorporate portfolio management algorithms that adjust individual, sector and overall market exposure based on observed and simulated patterns of market returns.

Risk Management

Position Management: IMFC utilizes proprietary quantitative algorithms to identify potential periods of underperformance in any particular commodity for IMFC strategies. In these situations, position sizes may be systematically reduced or eliminated until the same algorithms portend an end to the potential period of underperformance.As markets continue to evolve over time and as IMFC is continuously engaged in market research, a core feature if The IMFC Global Investment Program is that it may also, in the future, incorporate additional trading and risk-management strategies and/or modify or eliminate all or some of the current trading strategies already in use.IMFC believes that the success of a trading program is primarily contingent upon the implementation of a robust and well defined risk management model. IMFC utilizes a multi-faceted risk management program based on low levels of risk exposure and broad diversification that includes, but is not limited to, the following measures:Margin-to-Equity Targets: In an attempt to minimize exposure to the risk of adverse price movements, IMFC targets a level of trading activity that results in initial margin requirements that are generally between 12% and 17%. However, depending on market volatility and liquidity, these margin-to-equity ranges can be higher or lower;Risk Exposure Limits: IMFC utilizes a fixed risk budget that targets long-term average annualized portfolio volatility of less than 17% and long-term average downside deviation of less than 14%. This risk budget is equally allocated across over 60 markets and 576 distinct signal generators per market, resulting in a targeted risk budget per market and signal generator respectively, as measured by long-term average annualized volatility, of less than 50 basis points and 0.001%. This risk budget results in a 99% 1-month Portfolio Value-at-Risk (VaR) using Extreme Value Theory (EVT) of between 10-12%. Short-term volatility can however deviate substantially from targeted long-term average volatility. Furthermore, there may be circumstances where it is impossible to limit risk as described above. Such a circumstance may be a market that is locked limit up or down, or the occurrence of severe slippage on order execution due to extreme market volatility.Diversification: Diversification is applied to minimize the overall portfolio risk from any given market or trading model. IMFC uses multiple non-correlated signal generators and trades a diversified portfolio of futures contracts that involves most major commodity groups (i.e., agriculture, currencies, energy, interest rates, equities, livestock, metals and soft commodities). The selection process seeks to avoid undue concentration in any particular futures group and to achieve a balance across several groups. However, on occasion there may be a heavier concentration of a given commodity or commodity group, or no weighting of a given commodity or commodity group, which could result in a greater return or risk to the account;