Managed Futures

2014 Review & 2015 Outlook

Attain Capital Management

1 East Wacker Drive

Suite 3000

Chicago, IL 60601

312.604.0926

www.AttainCapital.com

invest@attaincapital.com

We said it in last year’s 2013 Review/2014 Outlook that the compression in US Bonds and the US Dollar was: “one mean, mean reversion waiting to happen, calling to mind all sorts of metaphors: a caged tiger, volcano getting ready to erupt, Hooke’s Law (the force with which the spring pushes back is linearly proportional to the distance from its equilibrium length). Whatever, you get the point. There is a lot of potential “fuel” there to power managed futures returns.” And boy was their fuel, mainly in the form of falling fuel prices and a trending US Dollar, pushing Managed Futures up +15% for the year to finish as the best performing hedge fund category in 2014, and 2nd best asset class among those we track. We've dedicated extensive have

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Managed Futures 2014 Review & 2015 Outlook 2

(Disclaimer: past performance is

not necessarily indicative of future results)

Source: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate, Bonds = Vanguard Total

Bond Market ETF (BND), Hedge Funds= Multi-Strategy ETF (QAI); Commodities = iShares GSCI ETF

(GSG); Real Estate = iShares DJ Real Estate ETF (IYR); World Stocks = iShares MSCI ACWI ex US Index Fund

ETF (ACWX); US Stocks = SPDR S&P 500 ETF (SPY)

Asset Class 2014

U.S. Real Estate 26.63%

Managed Futures 15.66%

U.S. Stocks 13.53%

Bonds 5.93%

Hedge Funds 2.77%

Cash 0.04%

World Stocks -3.96%

Commodities -32.00%

Cue the Parade!

While Crude Oil’s plunge was getting most of the headlines late last year, it was a strong up trend in the US Dollar, affectionately referred to as the Greenback in some circles, which most likely fueled the bulk of managed futures profits in 2014. For those who were too busy watching the price at the pump, here’s what the US Dollar Index did in that second half, tacking on 14.35% over six months.

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That might not sound like a lot, but consider that the Dollar Index is comprised of multiple currencies against the US Dollar, and that this is the world’s reserve currency we’re talking about, in which trillions of dollars in reserves and bonds and notes and all the rest are held. This isn’t some fly by night currency (ahem…bitcoin) which is known for its volatility. It’s known for not having a lot of volatility – that’s the whole point.

Thank the GreenBack

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100 per. Mov. Avg. (U.S. Dollar)

Disclaimer: Past performance is not necessarily indicative of future results) Data through 1/6/2015

Managed Futures 2014 Review & 2015 Outlook 3

Turns out a trending US Dollar is one of THE best environments around for managed futures, at about 3.5 times the monthly return of periods when the US Dollar isn’t trending (we considered the Dollar trending if its 14 period ADX reading was increasing from one month to the next, looking back to 1989). So keep cutting interest rates and doing buybacks ECB. And keep the Abenomic experiment going, BoJ. And keep growing US Economy – because we want to keep riding this US Dollar up trend (aka Euro, Yen, Pound down trend), as long as possible in the managed futures world.

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(Disclaimer: Past performance is not necessarily indicative of future results)

Data: Barclayhedge CTA Index starting in 11/’85

Managed Futures has a bit of a perception problem when it comes to non-correlation, mainly because many investors were sold on managed futures via the argument that they are NON-correlated with stocks and bonds (which they are), but shown an example of NEGATIVE correlation to support the argument. The example most investors are shown of managed futures NON correlation to stocks is 2008, when managed futures put in gains of 13% (per the Newedge CTA Index), while stocks were down -38% (per the S&P 500). The average 3 month rolling correlation between August and December 2008 was a very negative -0.91! [past performance is not necessarily indicative of future results]. Follow that up with a three year period when managed futures were flat while stocks were making all time highs – and you can’t fault people too much for thinking managed futures always zigs when stocks zag.

No Stock Crash?

Managed Futures 2014 Review & 2015 Outlook 4

Avg

Month Total RoR

% of Time Since ‘85

% of Time Since '09

Trending 0.72% 168% 48% 36%

Not Trending 0.20% 33% 52% 64%

All Periods 0.46% 270%

Problem is, that’s not how non-correlation really works. Correlations are real, live, breathing animals – not statistics etched in stone. How it really works is that the performance meanders (seemingly random at times) back and forth between positive and negative correlation (like the rolling 12mo correlation chart below), creating a long term average around zero, even if at times the values are well above and below that zero line. The issue is that investors are down there on the river encountering those bends in real time, sometimes feeling the positive correlation with stocks,

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Managed Futures 2014 Review & 2015 Outlook 5

-- and other times floating in the direction of NEGATIVE correlation.

Fast forward to 2014, and Managed Futures was definitely up the river a bit at the high end of its historical correlation with stocks, with a monthly return correlation to the S&P 500 of +0.60. Does this mean that Managed Futures as an asset class is now, positively correlated to stocks? No. You can see that over the 14 year time span, the average correlation of that meandering river sits at a decidedly non-correlated negative -0.14.

(Disclaimer: Past performance is not necessarily indicative of future results)

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12 Month Rolling Correlation

Correlation

12 Month Rolling Correlation of Managed Futures and Stocks

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Enough with US Dollars and correlations – let’s talk Volatility, the place to look for clues as to whether it was a good or bad environment for managed futures. Specifically, let’s talk whether volatility was expanding or contracting. Managed futures are often referred to as a “long volatility investment”, in part because their method of risking a little in hopes of making a lot is similar to an option buying strategy,

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Thank Volatility (in the 2nd Half)

and in part because they tend to do well (and are expected to do well) when volatility is on the rise. You can see in the chart below how good years for managed futures generally coincide with an increase in the volatility of multiple markets (see 2007 and 2008 as prime examples), and vice versa, with down years in volatility generally coinciding with poor years for managed futures (see 2009 and 2012).

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Volatility Increase/Decrease Across 47 Futures Markets

As measured by the difference in 'Average Daily True Range' using each calendar year as the lookback period

(Disclaimer: Past performance is not necessarily indicative of future results)

Managed Futures 2014 Review & 2015 Outlook 6

But here’s where it gets a little confusing, because 2014 was still mostly a declining volatility year. Sure, there are some big spikes up on the chart above (those are Coffee, Cattle, and Hogs for those interested); but the bulk of the markets are still below the line (64% of them, to be exact). So what’s going on?

Well, the old football writer saying ‘a tale of two halves’ had something to do with it. You see, while most markets did see a decrease in volatility (as measured by the Average True Range), we calculate it looking back across the whole year (From Jan. 1 to Dec. 31) And the volatility story in 2014 was definitely a tale of two halves. In fact, we did a blog post at the end of May talking about Complacency Everywhere, highlighting the VIX at 7 year lows, currencies all in the 5th percentile of historical volatility, the tightest 3 month range in 10 year notes in 35 years, and tightest consecutive ranges in the Euro since its inception!

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Managed Futures 2014 Review & 2015 Outlook 7

So you had incredibly low volatility in the first half of 2014, and an expansion of volatility off of those low levels in the second half; resulting in an overall volatility picture that was declining over the course of the full year (as we measure it…maybe we should measure it differently), despite being quite beneficial in the 2nd half of the year. How good was that second half? Where did volatility increase? In a lot of places. 68% of places to be exact, with 32 of the 47 markets we track seeing volatility increase an average of 20% in the last 6 months of the year. (See image next page)

Which brings us to an important part about managed futures performance as it relates to volatility. It isn’t linear. What do we mean by that? Well, if you buy a stock and it goes up 100 points, you make $100 per share. If it goes down 100 points, you lose $100 per share. It is a straightforward linear relationship. Now, if you look at managed futures as ‘betting’ on volatility expansion, you might think that if “volatility” goes up, you make some amount of money based on how much it went up, and if it goes down, lose the same amount of money.

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Managed Futures 2014 Review & 2015 Outlook 7

(Disclaimer: Past performance is not necessarily indicative of future results)

But managed futures performance profile is anything but linear, and is actually designed to be non-linear in respect to profits, losing small amounts consistently in order to sometimes make large amounts. This is what happened in 2014 in respect to volatility. The first half was a bad environment, with historically low volatility in many cases as outlined above. And the second half was a good environment, with the aforementioned expansion in volatility across many markets and sectors. But here’s where the asymmetric risk/reward comes in.

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Volatility Increase/Decrease 2nd Half (July 1 - Dec31) 2014

You see, managed futures was essentially flat through the first six months (around 0.46% positive for the year) in that bad environment, but was up about 12% (as measured by an average of indices) in the second half of the year! The asset class treaded water during the bad times, and captured the outlier moves during the good times. The risk (volatility declining) is a fraction of the reward (volatility increasing), by design.

All in all - Managed futures should be congratulated not just for the returns they put up in 2014, but more for their relationship with volatility and how they captured the increase in “global market” volatility. There’s nothing more frustrating than not knowing when and how your investment should and shouldn’t make money – and the last two years have given managed futures investors a sort of “true north”, showing that it’s not about the stock market’s returns – it’s about volatility expansion and trends elsewhere (which can and usually are tied to what the stock market does, but not always).

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Managed Futures 2014 Review & 2015 Outlook 8

2015 Outlook Enough of what happened; let’s get into what might happen next. Ok, as long as we remember that it's pure folly to pretend we can say with any accuracy where managed futures will end up over the next 12 months. We're not interested in playing that game. But we are interested in analyzing the conditions which caused managed futures as an asset class to perform the way it did in 2014, and discussing whether those conditions might persist in the New Year, reverse course, or yield to different conditions. We said the past two years that the asset class was due for some good returns after the past 4 years, and finally got on the right side of the cycle on that one. So what does 2015 bring? We’ll repeat that it’s silly to think anyone can know what will transpire in the various markets, their volatility, and timing of any moves and reversals. And we’ve already seen a prime example of that in the early part of the new year, when the Swiss National Bank depegged the Swiss Franc from the Euro, and most trend followers we’re caught on the other side of the trade.

But it’s no fun to just say – good luck – nobody knows what’s going to happen. It’s more fun to think about what might happen should energy prices rebound sharply, should bond yields finally start to rise – (almost a silly thought given how global rates are back at all time lows), or should the current trends continue.

Which brings us to a little problem managed futures is likely to have in 2015 – trends don’t last forever. Trends do continue, sometimes for years and years. But they also flatten out. Trends also reverse (although not typically as sharp as the Swiss Franc). And coming off a year where trend followers in particular benefitted greatly from big trends in the US Dollar and energies in the second half of the year, the million dollar question will be how much longer those trends last.

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Managed Futures 2014 Review & 2015 Outlook 9

Can they move as much as they’ve already moved (Crude falling another 40%)? It’s possible, but doubtful. The scenarios facing Managed Futures in general, and trend followers in particular, as it relates to those markets as we move into 2015 are, in order from most painful to most desirable: Now, having said that, it won’t all come down to the mighty US Dollar and Crude Oil market. There’s dozens of other markets in managed futures portfolios – not to mention specialized traders focusing in on markets like Agriculture – which are more than capable of picking up the slack. And remember the previous chart showing the US Dollar/Managed Futures link still has managed futures making money during non trending dollar periods.

1. Sharp, V shaped reversals in the US Dollar and Energy markets causing

steep losses in the first quarter. 2. A flattening out of the current up trend in the US Dollar and down trend

in energy markets, allowing for relatively painless exits of those trends, 3. A continuation or acceleration of those trends, providing further gains.

Of particular note may be the 64% of markets which saw volatility decline year over year. We’re talking markets like European Bonds, grains, metals, foreign currencies, and more. Volatility is nothing if not fickle, so it wouldn’t be a big surprise to see some of those contracted ranges in markets not named Coffee and Cattle become expanding ranges this year. Which leaves one very big, $40 Trillion big, elephant in the room. The US Stock market! You know, the one still within spitting distance of all time highs. What happens if this is finally the year that QE wears off/runs out of ammo?

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Managed Futures 2014 Review & 2015 Outlook 10

What if this is the year the dollar reverses – making US Stocks less attractive to foreign investors? In short, if we see a big sell off in US Stocks – any conversations about needing some volatility expansion will seem silly. We’ll have more than enough, if not too much for most people’s tastes. And our lesson on non-correlation versus negative correlation will likely be lost. Because the only thing managed futures loves more than expanding volatility and a trending US Dollar, is a stock market crisis period. Here’s to more volatility, more trends, and another strong year for managed futures in 2015. Learn more about Managed Futures by downloading our other whitepapers:

Truth and Lies in Alternatives Investments Trend Following Explained Why Investors Aren’t Getting What They Want out of Managed Futures Semi-Annual CTA Rankings (through July 2014) The History of Managed Futures

Attain Capital Management

1 East Wacker Drive

Suite 3000

Chicago, IL 60601

312.604.0926

www.AttainCapital.com

invest@attaincapital.com

About Attain:

Attain Capital Management is a registered commodity brokerage firm which has been helping investors identify and access top managed futures programs since 2002 , and currently allocate to 30+ managers with combined assets over $6 Billion (purposely avoiding the $1B+ managers). We have pulled over 2,800 managed futures programs into our database for further analysis, filtering that down to a list of approximately 300 we rank with our proprietary algorithm and believe are investable; and further filtering that down to just a handful that meet our client’s criteria and make it through our due diligence process. We then aid our clients in accessing these select managers via individual managed accounts (www.AttainCapital.com) or privately offered fund vehicles structured as LLCs (www.AttainFunds.com). Finally, we believe education is a key ingredient to success in alternative investments, and have authored over 500 whitepapers and research reports over the years, and share more frequent commentary and ideas on our popular Managed Futures Blog, which is read in over 50 countries around the world.

Disclaimer The information contained in this report is intended for informational purposes only. While the information and statistics given are believed to be complete and accurate, we cannot guarantee their completeness or accuracy. Attain has not undertaken to verify the completeness or accuracy of any of the information and statistics provided by third parties. As past performance does not guarantee future results, these results may have no bearing on, and may not be indicative of, any individual returns realized through participation in any of the investment programs detailed herein. Any specific investment or investment service contained or referred to in this report may not be suitable for all investors. You should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making such a decision on the appropriateness of such investments. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. You may sustain a total loss of the investment. Finally, the ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor performance. Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets. Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs. Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own. Attain Capital receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. CTAs may also pay Attain a portion of the fees they receive from accounts introduced to them by Attain. We recommend investors visit the Commodity Futures Trading Commission ("CFTC") website at the following address before trading: http://www.cftc.gov/cftc/cftcbeforetrade.htm

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