PRINCIPAL RISK FACTORS

THE FOLLOWING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INVOLVED IN THIS OFFERING.

Commodity and Security Futures Products trading is a high risk investment which should be made only after consultation with independent qualified sources of investment and tax advice. Clients participating in the trading program will be subjected to a number of risks, including but not limited to the following:

 Volatility

A principal risk in commodity trading is the tremendous volatility (rapid fluctuation) in market prices. Prices of commodities are affected by a wide variety of complex and hard to predict factors, such as political and economic events and the rapid prevailing psychological characteristics of the marketplace. Other factors may include supply and demand, weather, agricultural, trade, monetary policy, changes in exchange policy, policies of governments, acts of war or terrorism, changes in both domestic and international interest rates, inflation, currency devaluation or revaluation, and investor sentiment. Neither the CTA or the trading program have any control over these and other factors that may cause a rapid decline of a position’s value and result in losses greater than those intended by the use of stop loss orders. Trading a limited portfolio may result in clients experiencing greater performance volatility and greater risk of loss than would be experienced by a more diversified portfolio.

Security Futures Contracts

This disclosure statement discusses the characteristics and risks of standardized security futures contracts traded on regulated U.S. exchanges. At present, regulated exchanges are authorized to list futures contracts on individual equity securities registered under the Securities Exchange Act of 1934 (including common stock and certain exchange-traded funds and American Depositary Receipts), as well as narrow based security indices. Futures on other types of securities and options on security futures contracts may be authorized in the future.

The trading program may lose a substantial amount of money in a very short period of time. This is because futures’ trading is highly leveraged, with a relatively small amount of money used to establish a position in assets having a much greater value.

Trading security futures contracts involves risk and may result in losses. Although the high degree of leverage in security futures contracts can result in large and immediate gains, it can also result in large and immediate losses. As with any financial product, there is no such thing as a “sure winner.” Because of the leverage involved and the nature of security futures contract transactions, the trading program may feel the effects of losses immediately. Gains and losses in security futures contracts are credited or debited to the clients account, at a minimum, on a daily basis. If movements in the markets for security futures contracts or the underlying security decrease the value of the clients positions in security futures contracts, clients may be required to have or make additional funds available to the clients carrying firm as margin. If the clients account is under the minimum margin requirements set by the exchange or the brokerage firm, the clients position may be liquidated at a loss.

Under certain market conditions, it may be difficult or impossible to liquidate a position. Generally, the client must enter into an offsetting transaction in order to liquidate a position in a security futures contract. If you cannot liquidate the clients position in security futures contracts, the client may not be able to realize a gain in the value of your position or prevent losses from mounting. This inability to liquidate could occur, for example, if trading is halted due to unusual trading activity in either the security futures contract or the underlying security; if trading is halted due to recent news events involving the issuer of the underlying security; if systems failures occur on an exchange or at the firm carrying the clients position; or if the position is on an illiquid market. Even if the client can liquidate its position, the client may be forced to do so at a price that involves a large loss.

Under certain market conditions, it may also be difficult or impossible to manage your risk from open security futures positions by entering into an equivalent but opposite position in another contract month, on another market, or in the underlying security. This inability to take positions to limit the clients risk could occur, for example, if trading is halted across markets due to unusual trading activity in the security futures contract or the underlying security or due to recent news events involving the issuer of the underlying security.

Under certain market conditions, the prices of security futures contracts may not maintain their customary or anticipated relationships to the prices of the underlying security or index. These pricing disparities could occur, for example, when the market for the security futures contract is illiquid, when the primary market for the underlying security is closed, or when the reporting of transactions in the underlying security has been delayed. For index products, it could also occur when trading is delayed or halted in some or all of the securities that make up the index.

The client may be required to settle certain security futures contracts with physical delivery of the underlying security. If the client holds a position in a physically settled security futures contract until the end of the last trading day prior to expiration, the client will be obligated to make or take delivery of the underlying securities, which could involve additional costs. The actual settlement terms may vary from contract to contract and exchange to exchange.

The client may experience losses due to systems failures. As with any financial transaction, the client may experience losses if your orders for security futures contracts cannot be executed normally due to systems failures on a regulated exchange or at the brokerage firm carrying the clients position. The clients losses may be greater if the brokerage firm carrying the clients position does not have adequate back-up systems or procedures.

For most taxpayers, security futures contracts are not treated like other futures contracts. Instead, the tax consequences of a security futures transaction depend on the status of the taxpayer and the type of position (e.g., long or short, covered or uncovered). Because of the importance of tax considerations to transactions in security futures, readers should consult their tax advisors as to the tax consequences of these transactions.

 Exchange for Physicals

Exchange for physicals (EFP) is a form of privately negotiated physical settlement of long and short futures positions held by two parties. Every futures contract has a last trade date and a delivery period specified by the exchange. In the case of a cash settled future, the delivery period is the last trade date. On that date, the settlement price is set equal to the cash price of the underlier. There is a final margining based on that settlement price, and then the contract expires.

For physically settled futures, exchange rules depend upon the specific underlier. Usually, there is an entire month—called the delivery month—during which delivery may occur. The last trading day for the future falls towards the end of that month. A party that is short a future may elect to deliver the underlier on any business day in the delivery month. Typically, notice of delivery must be made to the exchange two business days prior to delivery. The date on which notice is given is called the notice date. The first possible date for notice comes towards the end of the month preceding the delivery month. It is called the first notice date. Upon receiving notice of delivery, the exchange selects a party that is long the future to take the delivery. This may be the party with the largest long position in the future. Alternatively, the party to take delivery may be selected by lot.

Exchanges specify conditions of delivery. These include acceptable locations for delivery, in the case of commodities or energies. It includes specifics about the quality, grade or nature of the underlier to be delivered. For example, only certain Treasury bonds may be delivered under the Chicago Board of Trade's Treasury bond future. Only certain growths of coffee may be delivered under the Coffee, Sugar and Cocoa Exchange's coffee future. Additional risks may include changes in the value of the underlying physical as well as the cost to carry. These cost may include insurance, storage, security, transportation, inspection, maintenance and in the case of livestock the cost of feed.

Leverage

 Commodity futures contracts are traded on margin which typically ranges from about 2% to 20% of the value of the contract. Low margin provides large amount of leverage, i.e., futures contracts for a larger number of units (bushels, pounds, etc.) of a commodity, having a value substantially greater than the margin, may be traded for a relatively small amount of money. Hence a relatively small change in the market price of a commodity can produce a corresponding large profit or loss. If the CTA invests a substantial portion of the assets of the client in such a situation, a substantial change, up or down, in the value of the client could result. For example, if at the time of purchase 5% of the price of a futures contract is deposited as margin, a 5% decrease in the price of the futures contract would, if the contract were to close out, result in a total loss of the margin deposit. Brokerage commissions and other expenses also would be incurred and would have to be paid despite the loss.  

Liquidity

 It is not always possible to execute a buy or sell order at the desired price, or to close out an open position due to market conditions and/or price fluctuations. As an example of this latter risk, it should be noted that when the market price of a commodity futures contract reaches its daily price fluctuation limit, no trades, or only a limited amount of trades, can be executed. Daily price fluctuation limits are established by the exchanges and approved by the CFTC. The holder of a commodity futures contract may therefore be locked into an adverse price movement for several days or more and lose considerably more than the initial margin paid to establish a position. In certain commodities, the daily price fluctuation limits may apply through the life of the contract, and hence the holder of a futures contract who cannot liquidate his position by the end of the trading on the last day may be required to make or take delivery of the commodity. Additionally, difficult or impossible execution may occur in a thinly traded markets or markets which lack sufficient trading liquidity. As a result, no assurance can be given that the CTA’s orders will be executed at or near the desired price. 

Regulatory Changes

Regulatory changes may materially alter the performance of a clients interest in this offering. Exchanges could substantially raise margin requirements making it difficult to maintain existing positions or to initiate new positions at desired levels without diminishing profit potential.

 Diluted Returns Due to Increased Assets Under Management

Substantial increases in assets under management could negativity effect rates of return. The CTA has not limited the number of subscriptions or equity for this client. Furthermore, the CTA will aggressively seek new subscriptions for the offering.

Counterparty Creditworthiness

The client may be unable to recover assets held at the Commodity Broker, even assets directly traceable to the client, from the Commodity Broker in the event of a bankruptcy of the Commodity Broker. Although Futures Commission Merchants are required to segregate customer funds pursuant to the Commodity exchange Act, there is no equivalent, in the unlikely event of the Commodity Broker’s bankruptcy, of Securities Investors Protection Corporation Insurance applicable in the case of securities broker dealer bankruptcies.

Off exchange are also subject to the risk of counterparty failure and/or a counterparty’s inability or refusal to perform with respect to such transactions. Any such default may deprive the client of any profit potential or force the client to cover its commitments for resale, if any, at the market price, thereby resulting in a loss to the client. In addition, off exchange transactions are not subject to regulation by the CFTC and are not subject to the protections afforded to transactions effected on a contract market.

Selling Options on Futures Contracts

An option on a futures contract gives the purchaser of the option the right, but not the obligation, to take a position at a specified price (the “striking” or “exercise” price) in the underlying futures contract. The purchase of an option is referred to as its “premium” and is paid to the seller of the option.

Market participants that sell options are known as option writers or grantors. The sole reason for writing options is to earn the premium paid by the option buyer. If the option expires without being exercised (which is what the option writer hopes will happen), the writer retains the full amount of the premium. If the option buyer exercises the option, however, the writer of an option has an unlimited risk. This is because any gain realized by the option buyer if and when he exercises the option will become a loss for the option writer. Stated another way, the writer of an option risks losing the difference between the premium received for the option and the price of the futures contracts underlying the option which the writer must purchase or deliver upon exercise of the option. This could subject the writer to an unlimited risk in the event of an increase in the price of the contract to be purchased or delivered.

The price movement of the underlying futures contract determines whether the option expires without being exercised or whether the option is exercised because it is “in the money”. Futures contracts prices are volatile. The profitability of the CTA’s options trading may depend on anticipating the volatile price movements of the futures contract underlying the options.

Transactions on Non-U.S. Exchanges  

The CTA may trade contracts on foreign exchanges. Investors should be aware that foreign exchanges are not regulated by the Commodity Futures Trading Commission. In addition, contracts traded on foreign exchanges are typically denominated in the local currency. Consequently, any such trades may be subject to the risk of fluctuations in the exchange rate between the relevant currency and the U.S. dollar. Furthermore, some foreign exchanges, in contrast to exchanges in the United States, are “principal’s markets” similar to the forward markets, in which responsibility for performance is only that of the individual member with whom a trader has entered into a transaction, and not of an exchange or exchange clearing house.

Off-Exchange

An exchange is often the most important component of a market. There is usually no compulsion to issue securities via the exchange itself, nor must securities be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that Bonds are traded. Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is the opposite of exchange trading which occurs on futures exchanges or stock exchanges. An over-the-counter contract is a bi-lateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement. An over-the-counter market is a financial market where products are traded over-the-counter.In some jurisdictions, and only then in restricted circumstances, firms are permitted to effect off-exchange transactions. The firm with which the client may deal with may be acting as your counterparty to the transaction. It may be difficult or impossible to liquidate an existing position, to assess the value, to determine a fair price or to assess the exposure to risk. For these reasons, these transactions may involve increased risks. Off-exchange transactions may be less regulated or subject to a separate regulatory regime. Investors should be aware that off-exchange transactions are not regulated by the Commodity Futures Trading Commission. In addition, off-exchange transactions traded on foreign exchanges are typically denominated in the local currency. Consequently, any such trades may be subject to the risk of fluctuations in the exchange rate between the relevant currency and the U.S. dollar. Furthermore, some off-exchange transactions, are “principal’s markets”. in which responsibility for performance is only that of the individual member with whom a trader has entered into a transaction, and not of an exchange or exchange clearing house. Off-exchange transactions located outside the United States, including markets formally linked to a United States market, may be subject to regulations which offer different or diminished protections to the client and its participants. Further, United States regulatory authorities may be unable to compel the enforcement of the rules of regulatory authorities or markets in off-exchange transactions where transactions for the client may be effected.