PAST PERMORMANCE IS NOT INDICATIVE OF FUTURE RETURNS.
Cervino Capital Management's DIVERSIFIED OPTIONS STRATEGY 2X is an absolute return program which involves the same trading strategies as the Diversified Options Strategy 1X program but will trade twice as many contracts as the 1X program for the same nominal account size. Accordingly, the additional leverage of the 2X program is expected to result in increased account volatility, and therefore an increased potential for higher returns as well as an increased potential for larger drawdowns. The objective is to generate consistent monthly returns averaging between 100bps and 500bps for an annualized target of 20% to 30% per year. The maximum peak-to-trough drawdown since inception is (10.24%) and began in September 2008. The program trades options on a diversified portfolio of financial futures contracts including equity indices, fixed income, currencies, and precious metals. Opportunity and risk exposure is further diversified through use of different types of complex option positions such as debit spreads, credit spreads, condors, ratio spreads, strangles and calendar spreads as well as naked puts and calls. There are varying risks associated with these strategies, including the risk of unlimited loss associated with writing naked calls or puts. Risk control is instituted through a variety of means with the aim of minimizing drawdowns in most market conditions. The first is portfolio construction and diversification; second is controlling leverage through position sizing adjusted according to account size, volatility and risk-reward analysis; and third is stops based on money management rules. Risk control might not limit drawdowns. The levered performance of the Diversified Options Strategy 2X program compared to the 1X program may vary as the composite performance reflects a different set of underlying client accounts.
There is a risk of loss trading futures and options. They are intended for sophisticated investors and therefore are not suitable for everyone. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Cervino Capital Management specializes in trading separate managed accounts for sophisticated investors. Our primary objective is to produce risk-adjusted "skill-based" returns through a variety of alternative and traditional strategies. Our investment philosophy recognizes that investment performance is a function of risk taken, but also that the complexity of human behavior can never be fully modeled. And while mathematical techniques reveal important dynamics within the markets, circular relationships between cause and effect relegate quant models to just an abstraction of reality... Expecting models to be exactly right is unreasonable. Rather, a discretionary common sense approach is needed-one which balances the quantitative with the qualitative in order to manage the cycles of volatility.
The following passages are excerpts from our working paper available at: http://ssrn.com/abstract=1029243
"Keynes believed that fundamental uncertainty is a crucial element in any economic processes. And that under most circumstances, even if probabilities could be estimated, they [are] meaningless for long period decision making. The nature and power of market forces cannot deal with the unpredictability of the long run, and relying on them to do so will lead to incomplete information." Ric Holt's Post-Keynesian articulation of Keynes's ideas on uncertainty and predictability underscores our thesis. From our perspective as practitioners, it seems obvious that the truth is somewhere in the middle rather than at the ideological extremes of neoclassical ergodic systems. Models are not exclusive and each reveal underlying qualities within the aggregate wealth portfolio of all agents in the global economy.
Our investigation shows that the research is inconclusive with respect to modeling sources of returns in the commodity futures markets, largely because these models have inherent shortcomings in being able to pinpoint a definitive source of structural risk premium within the complexity of such markets. We hypothesize that the classic arbitrage pricing theory contains circular logic, and as a consequence, its natural state is disequilibrium, not equilibrium. We extend this hypothesis to suggest that the term structure of the futures price curve, while indicative of a potential roll return benefit (or detriment), in fact implies a complex series of roll yield permutations. Similarly, the hedging response function elicits behavioral risk management mechanisms, and therefore, corroborates social reflexivity. Such models are inter-related and each reflects certain qualities and dynamics within the overall futures market paradigm.
These models do not operate to the exclusion of the other, nor exclusively from each other; instead, such models are inter-related and each reflect certain aspects and dynamics within the overall futures market paradigm. What these models convey is an insightful understanding, provided one accepts that in the real world agents are irrational, that markets drift from disequilibrium to equilibrium and back, and inputs/outputs are reflexive. Hence, we posit that the combination of futures pricing models in fact support a post-Keynesian view that the world is messy and uncertain.
DAVIDE ACCOMAZZO, Managing Director and Chief Investment Officer, has been trading professionally since 1996. From 1996 through 1997 he was employed as a Euro-convertible bond/international equities sales trader for Jefferies Group, Inc. in their New York office. In this position he covered many international funds including Arca, La Generali, Hansberger, New Africa Fund/NCM, Cranberry Rock, Pontaray, Weston Group, and Oppenheimer. In 1998 he left to trade his own capital and in 1999 he started Kensington Offshore Limited, a speculative hedge fund which outperformed the S&P 500 market benchmark during the 1999 through 2002 boom and bust economic cycles. In 2001 he launched Kensington Capital Management LLC, a CTA that focused on trading options on futures and currency futures. Mr. Accomazzo was signed on by UBS Wealth Management USA in 2004 to manage the portfolios of high net worth investors. In 2005, Mr. Accomazzo co-founded Cervino Capital Management LLC as Managing Director, Chief Investment Officer and is the company's principal trader. Mr. Accomazzo received a Laurea in Political Sciences and International Relations at Universita' degli Studi Genova in 1990, a Masters in Arts in Mass Comm. from California State University Northridge in 1992, and his MBA in Finance at the School of Business and Management at Pepperdine University in June 1996. Mr. Accomazzo also serves as an adjunct professor at Pepperdine University, Graziadio School of Business, where he teaches courses on global capital markets and portfolio investment management.
MACK FRANKFURTER, Managing Director and Chief of Operations, started his career in the financial services industry in 1989 with Bank of America. In 1991 he joined The Echelon Group, Inc. as Vice President in charge of operations of Echelon's $250 million managed futures business. As an Associated Person, he was involved with the startup, accounting, client services, compliance, backoffice and marketing of multiple joint venture CTAs including Dreiss Research Corporation, Jackson Grain Management, and Range Wise. Mr. Frankfurter was also involved in activities related to the establishment of other Echelon-related ventures including Dignity Partners, Inc., a viatical settlement business. Dignity Partners institutionalized the viatical settlement industry by successfully completing a private placement of $50 million in securitized notes (voted 1995 Private Deal of the Year by Investment Dealers Digest), and a subsequent initial public offering in 1996. In January 1999 he left Echelon and consulted for investment bank FleetBoston Robertson Stephens before joining Capco in 2000 as a Senior Consultant. While with Capco he worked on a variety of long-term projects for Scudder Kemper/Thomas Weisel, Commerzbank and Bank of Montreal. Mr. Frankfurter was hired by UBS Financial Services, Inc. in 2004, and in 2005 left to rejoin NextStep Strategies, LLC, a consultancy company he established in 2002. In July 2005 he co-founded Cervino Capital Management LLC where he serves as Chief of Operations and Compliance Director. As of September 2007, Mr. Frankfurter is also Chief Investment Strategist for Managed Account Research, Inc. where he performs research on managed futures investments.
This presentation does not constitute a solicitation to invest, which may only be made at the time a qualified investor receives the disclosure document of Cervino Capital Management LLC. Derivatives transactions, including futures and options, are complex and carry a high degree of risk. There is a risk of loss trading futures and options. They are intended for sophisticated investors and are not suitable for everyone. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. See disclosure document for additional discussion of risks.
RATE OF RETURN FORMULAS
Total ROR: Total compound return since inception of program. Calculated as (ROR1 * ROR2 * _ * RORn - 1) * 100%. Where RORi = rate of return of i period calculated as (Ri / 100) + 1, and n is number of periods since inception.
Annual ROR: Annualized compound return since inception of program. Calculated as ((ROR1 * ROR2 * _ * RORn ) ^ 12/n - 1) * 100%. Where RORi = rate of return of i period calculated as (Ri / 100) + 1, and n is number of periods since inception. If i period is less than twelve months, then formula annualizes compound return.
Year to Date: Total compound return starting with first month of the current year.
1 Year: Compound annual return for most recent rolling twelve month period (n = 12). If program has less than twelve month history, then formula reflects total compound return since inception of program.
3 Year: Compound annual return for most recent rolling thirty-six month period (n = 36). If program has less than thirty-six month history, then formula reflects total compound return since inception of program.