1. The Resource Group Annual Meeting
Understanding Managed Futures
A Former Institutional Investor's Perspective
On Managed Futures
Thomas J. O’Donnell, III
First Vice President
Newedge USA, LLC
Alternative Investments Group Ph
For Continuing Education for CFP®, PACE and CPE use. Broker/dealer use only. Not to be used with the public.
Lincoln Financial Network is the marketing name for Lincoln Financial Services Corporation and Lincoln Financial Advisors Corp., affiliates of Lincoln Financial Group. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. CRN

2. Academic Resources 1983 Professor John K. Litner of Harvard University
"The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,”
Professor Litner wrote:
“The improvements from holding an efficiently-selected portfolio of managed accounts or funds are so large, and the correlation between returns on the futures portfolios and those on the stock and bond portfolios are so low (sometimes even negative), that the return/risk tradeoffs provided by augmented portfolios…clearly dominate the tradeoffs available from portfolio of stocks alone or from a portfolios of stocks and bonds."
1991
Everett, McLaren, and O’Donnell
“Virginia Retirement System Managed Futures White Paper”
1999
Thomas Schneeweis, Professor of Finance CISDM/SOM, University of Massachusetts
“The Benefits of Managed Futures”
2000
Mark S. Rzepczynski
“Market Vision and Managed Futures: Convergent Versus Divergent Trading Styles”

3. Academic Resources
2002
Harry M. Kat, Professor of Risk Management, Cass Business School, City University, London
“Managed Futures and Hedge Funds: A Match Made in Heaven”
Gildo Lungarella
“Managed Futures: A Real Alternative”
2004
Steve Koomar
“managed futures can save your tail”
2006
Kip Thompson
“A Case for Managed Futures - Portfolio Diversification Opportunities”
“The Case for Managed Futures - Trading advisors are an attractive source of diversification”

4. Commodity Trading Advisors (CTAs) Are Unique
97.3% of Magellan’s return can be
explained by traditional assets.
Only 4.8% of this CTA’s return can
be explained by traditional assets.
ASSET ALLOCATION: MANAGEMENT STYLE AND PERFORMANCE MEASUREMENT
An Asset class factor model can help make order out of chaos
William F. Sharpe*
Reprinted from the Journal of Portfolio Management, Winter 1992, pp
Virginia Retirement System, Managed Futures White Paper
John McLaren
Nancy C. Everett, CFA
Thomas J. O’Donnell, III

5. Source: Barclay Hedge Ltd., www.barclayhedge.com
Estimated Growth of Assets Managed Futures Industry and Hedge Fund Industry
1990 – 2008
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008,
Source: Barclay Hedge Ltd.,

6. Number of Programs in Barclay CTA Index
1980 – 2008
To qualify for inclusion in the Barclay CTA Index, an advisor must have four years of prior performance history. Additional programs introduced by qualified advisors are not added to the Index until after their second year. These restrictions, which offset the high turnover rates of trading advisors as well as their artificially high short-term performance records, ensure the accuracy and reliability of the Barclay CTA Index.
Source: Barclay Hedge Ltd.,

7. Importance of Asset Allocation
The 1986 paper titled, “Determinants of Portfolio Performance,” by Brinson, Hood, and Beebower concluded that a portfolio’s asset allocation (i.e. the weightings assigned to the asset classes) is the primary determinant of portfolio return variability, with security selection and market timing playing minor roles.
Equities
Fixed
Income
Real Estate
Cash %
This decision is most important.
Examples of other Asset Allocation decisions:
Which asset classes?
Active and passive?
International mandates?
Global mandates?
Emerging market mandates?
Currency hedging?
Equity market capitalization mandates?
Liquid vs. illiquid investments?
Hedge Funds/Alternative Investments?
Benchmarks?
Rebalancing?
Return objective: Relative or Absolute?

8. Source: Barclay Hedge Ltd., www.barclayhedge.com
Managed Futures Represents a Significant Portion of Hedge Fund Industry AUM (Est. Asset in $MM)
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008,
Source: Barclay Hedge Ltd.,

9. Which Hedge Funds Offer Asset Class Diversification?
Hedge Fund Asset Class Exposure
Convertible Arbitrage
Distressed Securities
Equity Hedge
Equity Market Neutral
Equity Non-Hedge
Event-Driven
Macro
Managed Futures
Relative Value Arbitrage
Convertible Arbitrage
Distressed Securities
Event-Driven
Fixed Income: Arbitrage
Fixed Income: Mortgage-Backed
Macro
Managed Futures
Relative Value Arbitrage
Equities
Fixed Income
Currencies
Commodities
Macro
Managed Futures
Macro
Managed Futures

10. My Suggestion: Investment Objectives for “Traditional” Hedge Funds versus Managed Futures
Should fulfill the following three investment objectives:
(1) Improve your source of Active Equity or Active Fixed Income management;
(2) Achieve satisfactory risk adjusted returns relative to other Equity or
Fixed Income investments; and
(3) To the extent that the managers implementing these strategies have the
ability to short, then some level of diversification is possible.
Equities
Fixed
Income
Alternative
Investments %
Investment Objectives For Managed Futures Program
Should fulfill the following three investment objectives:
(1) Diversification of the total portfolio;
(2) Achieve satisfactory returns in both rising and falling markets; and
(3) Returns should be achieved at a reasonable level of risk.
Equities %
Fixed
Income % %
Alternative
Investments

11. Global Futures Markets
Energy
Crude Oil
Gas Oil
Heating Oil
Natural Gas
Unleaded Gas
Stock Indices
DAX (Germany)
DJ Euro Stoxx 50 (Europe)
Hang Seng (Hong Kong)
MSCI EAFE (Europe)
NASDAQ 100 (USA)
Nikkei (Japan)
S&P 500 (USA)
Metals
Aluminum
Copper
Gold
Silver
Nickel
Zinc
Currencies
Australian Dollar
British Pound
Canadian Dollar
Euro
Japanese Yen
Mexican Peso
New Zealand Dollar
South African Rand
Swiss Franc
US Dollar
Agricultural Commodities
Soybeans
Soymeal
Corn
Wheat
Cotton
Cocoa
Coffee
Sugar
Interest Rates
JGB (Japan)
Notional (France)
Treasury Bonds & Notes (USA)
Bank Accepted Bill (Australia)
Euribor (Europe)
Bankers Acceptance (Canada)

12. Traditional Markets vs. Non-Traditional Markets
QUIZ
Investing in a globally diversified portfolio of stocks, bonds, currencies, and commodities enables CTAs and Global Macro managers to participate, both long and short, in a variety of non-correlated market trends.
This quiz was designed to highlight the fact that markets move in two directions, and to dispel the myth that the appearance of a traditional market trend (e.g. stocks and bonds) is uniquely different from a non-traditional market trend (e.g. currencies and commodities).
See if you can tell the difference.

14. Interest Rate – 5 Yr US T-Note
Commodity – Crude Oil
Equity Market – S&P500
Interest Rate – 5 Yr US T-Note
Commodity – Gold
Stock - Yahoo
Currency – US Dollar
Currency – Australian Dollar
Commodity - Soybeans
Stock - Enron
Source of price data: Bloomberg

15. Range of Best Performing to Worst Performing CTAs and L/S Equity Managers
Source: Barclay Hedge Ltd.,
Past performance is not necessarily indicative of future results. 14

16. Rational For Variance in CTA Returns
Professional money managers who manage the assets of their clients using derivative instruments
(futures, forward contracts, and options) are known as Commodity Trading Advisors (CTAs). As an
asset category in the alternative investment industry, they are classified as Managed Futures.
The Various Investment Approaches of CTAs
1. Trading
Approach
Systematic
Discretionary
Systematic/
2. Analysis
Technical
Fundamental
Technical/
3. Trading Style
Momentum
Countertrend
Spreads/
Others
4. Time Frame -
1-5 days
6-20 days
> 20 days
5. Markets Traded
Single sector
or market
Broadly
diversified
SOURCE: swissHedge article by Gildo Lungarella, Harcourt AG (Nov. 2002) 15

17. Scientists develop fastest computer
Prospective investor says, “We don’t invest in black boxes.”
Scientists develop fastest computer 16

18. Managed Futures and Traditional Assets (1980 – 2008)

19. Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008)
Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted Index
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008,
Source: Center for International Securities and Derivatives Markets CISDM,
Past performance is not necessarily indicative of future performance. 18

20. Managed Futures and Other Hedge Fund Strategies (Jan 1990 to Dec 2008)
Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted Index
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008,
Source: Center for International Securities and Derivatives Markets CISDM,
Past performance is not necessarily indicative of future performance. 19

21. Annualized Returns & Correlation to the S&P500
Alpha, Beta, Diversification?
Annualized Returns & Correlation to the S&P500
Jan 1990 – Dec 2008
BARS (LEFT SCALE): Annualized Rate of Return
RED LINE (RIGHT SCALE): Correlation to S&P500
Return
Correlation
Indices: Hedge Fund Research Indices (HFRI) and Managed Futures = CISDM CTA Asset Weighted Index
Source: HFR Global Hedge Fund Industry Reports, © HFR, Inc. Year end 2008,
Source: Center for International Securities and Derivatives Markets CISDM,
Past performance is not necessarily indicative of future performance. 20

22. Negatively Correlated vs. Non-Correlated
Investments A & B
Investments A & B
Same Risk, Same Return
Correlation = (1.00)
Same Risk, Same Return
Correlation = (0.14)
Investment C
Investment C
50% of Investment A & 50% of Investment B
Same Return, No Risk (Standard Deviation = Zero)
50% of Investment A & 50% of Investment B
Higher Return, Lower Risk (Standard Deviation)
This is for illustrative purposes only. Investments A and B are not real investments. 21

23. 6 Largest Declines in U.S. Stocks Using monthly data
(Jan Dec 2008)
Indices: U.S. Stocks – S&P500 Index , Managed Futures = CISDM CTA Asset Weighted Index
Past performance is not necessarily indicative of future performance. 22

24. (January, 1980 Through December, 2006)
A Case for Managed Futures - Portfolio Diversification Opportunities
(Kip Thompson, Rosenthal Collins Group LP)
(January, 1980 Through December, 2006)
The Effect of Diversifying a Traditional Portfolio into Managed Futures
40% Managed Futures | 20% Bonds | 40% Stocks
30% Managed Futures | 25% Bonds | 45% Stocks
20% Managed Futures | 30% Bonds | 50% Stocks
Compounded Annual Return
10% Managed Futures | 35% Bonds | 55% Stocks
Higher Returns
Less Risk
0% Managed Futures | 40% Bonds | 60% Stocks
Annualized Standard Deviation
Data: Managed Futures – CISDM Managed Futures Index , U.S. Stocks – S&P500 Index, Bonds – Lehman Brothers Aggregate Bond Index
Past performance is not necessarily indicative of future performance.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS SIMILAR TO THOSE SHOWN OR WILL NOT BE ABLE TO AVOID SUBSTANTIAL LOSSES. IN FACT, FREQUENTLY THERE ARE SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS; ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
The information on this page was copied from the paper titled “A Case for Managed Futures.” Newedge USA, LLC is not recommending these allocations. 23

25. Rolling 12-Month Returns
Risk vs. Volatility
Rolling 12-Month Returns
Past performance is not necessarily indicative of future performance. 24

26. A Few Observations
One of the most cited reasons for investing in alternative investments (e.g. Hedge
Funds) is DIVERSIFICATION.
– What actions have you taken to help your portfolio benefit from this?
Markets move in TWO directions.
The World’s Portfolio of exchange traded, liquid investments includes
EQUITIES, FIXED INCOME, CURRENCIES, AND COMMODITIES
– What decisions have you made within your Asset Allocation Policy about these
investment opportunities?
(Doing nothing is a decision. Just make sure you have the evidence to back it up!) 25

27. The Challenge
Write the research report that proves why you should NOT invest in Managed Futures.
me a copy: 26

28. Risk Disclaimer
Global Disclaimer Research Notes-(Last Updated 1 Feb. 2009)
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THE DISTRIBUTION OF THIS RESEARCH REPORT IN OTHER JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW, AND PERSONS INTO WHOSE POSSESSION THIS RESEARCH REPORT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH PROHIBITION OR RESTRICTIONS. BY ACCEPTING THIS RESEARCH REPORT YOU AGREE TO BE BOUND BY THE FOREGOING. 27

29. Appendix

30. Managed Futures Industry Terms & Index Definition
Commodity Exchange Act (CEA)
The federal act that provides for federal regulation of futures trading.
Commodity Futures Trading Commission (CFTC)
The federal regulatory agency established in 1974 that administers the Commodity Exchange Act. The CFTC monitors the futures and options on futures markets in the United States.
National Futures Association (NFA)
Authorized by Congress in 1974 and designated by the CFTC in 1982 as a “registered futures association,” NFA is the industry wide self-regulatory organization of the futures industry.
Commodity Trading Advisor (CTA)
A person who, for compensation or profit, directly or indirectly advises others as to the advisability of buying or selling futures or commodity options. Providing advice includes exercising trading authority over a customer’s account. A US-based CTA is generally required to be registered with the CFTC.
Futures Contract
A legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. The only variable is price.
SOURCE:
Glossary of Futures Terms:
An Introduction to the Language
of the Futures Industry
©1998 National Futures Association
The CISDM CTA Asset Weighted Index reflects the dollar-weighted performance of commodity trading advisers (CTAs) reporting to the CISDM Hedge Fund/CTA Database. CTAs trade a wide variety of over the counter (OTC) and exchange traded forward, futures, and options markets (e.g., physicals, currency, financial) based on a variety of trading models. To be included in the asset weighted index universe, a CTA must have at
least $500,000 under management and at least a twelve month track record. The index dates to January The weights are revised monthly. The weight of a fund each month is its assets under management at the end of the month divided by the total assets under management of all qualifying funds. 29