Arch Capital Management, Inc.

Arch Capital Program

Arch Capital's Program will seek to generate high risk-adjusted returns by means of intermittent trading in selected commodity interests. Relying solely on technical data, the Program will seek to profit from short-term price movements when the Advisor believes that large capital flows are entering or leaving the market. To determine its market entry and exit points, the Advisor will rely on proprietary systematic trading models that its principals have extensively developed and tested in-house. These models will operate mechanically with no discretionary input. Because of its targeted trading approach, the Program is likely to experience occasional periods of inactivity. The trading methods to be applied by Arch Capital are both proprietary and confidential. As a result, the following discussion is of necessity general in nature and not intended to be exhaustive. Arch Capital plans to continue the testing and reworking of its trading methodology and, therefore, retains the discretion to revise any method or strategy, including the technical trading factors used, the commodity interests traded and/or the money management principles applied. Such revisions, unless deemed material, will not be made known to clients. Markets Traded The Program currently takes positions in some or all of the following commodity interests: stock indices (for example, Standard & Poor's 500 Stock Index, E-Mini S&P 500 Stock Index) and interest rates (U.S. Treasury Bond). As indicated above, the Program may use mini contracts depending on the size of the account. Additional contracts may be added and contracts may be deleted at any time at the sole discretion of Arch Capital, which may also decide at any time to expand the markets in which contracts are traded. Depending on market conditions, at any point in time, accounts may have positions in all markets or some markets, or have liquidated all positions. The Advisor expects that the Program will occasionally experience periods during which all positions have been liquidated. Systematic Models Using Technical Data The Program is built on a number of different systematic trading models, all of which are proprietary and developed in-house. All are based on historical studies of market behavior and recurring patterns. The models rely entirely on numerical data, such as prices. No fundamental information will be used to make any trading decisions. The Advisors intend to rigorously adhere to the Program's trading system and not over-ride any of its signals. However, the selection of models used and their relative weightings within the Program may change periodically at the Advisor's discretion as it develops new models and re-evaluates existing ones. The four categories of models that currently make up the Program's overall strategy are identified below. Flow Detection Models Flow Detection models seek to reveal the presence of ongoing capital flows into or out of a given market. These models attempt to recognize those conditions that foretell continued buying or selling and will signal an intra-day buy or sell order in advance of what the Advisor believes to be a follow-through price move in that market. Target Period Models Target Period models seek to anticipate rather than detect the presence of capital flows. These models rely on extensive historical studies of intra-day price tendencies to pinpoint those times when the collective action of market participants is likely to be one-sided. Shifting Period Models Shifting Period models are also anticipatory in nature but rely on recognizing price patterns revealed in recent market activity to generate their trading signals. Option-Based Strategies Option-based strategies may be also be employed, either as a hedging tool or in an attempt to capitalize on what the Program determines to be periods of increased or decreased volatility. It should be noted that the Program will never hold naked, or uncovered, short option positions. To the extent that options are sold, they will always be covered (to limit the maximum potential risk of the position). Options may also be purchased. Arch Capital believes that it has developed models that are considerably different from those in use by other Commodity Trading Advisors. As a result, its program is short- to intermediate-term and predominantly non-trend following in nature. In addition, by employing unconventional models, Arch Capital believes that it can generate returns that are largely uncorrelated with those of other Commodity Trading Advisors. The Program relies exclusively on technical data for its evaluation of market activity. Technical data is data intrinsic to a market, such as volume and price. This is to be distinguished from fundamental data which involves information extrinsic to the market, such as supply and demand. The Program uses no fundamental data. The Program rigorously adheres to the trading signals of its systematic models, which are never over-ruled by the Advisor. The Program does not engage in discretionary trading. However, the systematic trading models are expected to be changed occasionally by the Advisor in the course of its regular performance evaluations. Focus on Risk By their nature, futures are risky instruments. Arch Capital has imposed certain restrictions upon the Program in light of their inherent risk. Arch Capital closely follows the rule that returns alone should never be used to evaluate the merits of an investment. This is particularly true when considering a managed futures program because of the high degree of leverage that is possible with futures. In fact, returns alone reveal nothing about the risks to which an account may have been exposed in pursuit of those returns. The Program sets as its objective a high Sharpe Ratio instead of a high absolute return. The Sharpe Ratio measures risk-adjusted return, and striving to maximize this value has resulted in a program that naturally incorporates a risk management discipline into the trading strategy itself. Use of leverage. As noted above, the trading of commodity interests typically involves extensive use of leverage. The Advisor expects the average margin-to-equity ratio for client accounts to be 10%. This ratio is expected to vary from 0% to 35% over time, and may also sometimes exceed the high end of this range. Account activity. Based on a roundturn brokerage commission of $15, all inclusive, Arch Capital's commission-to-equity ratio is estimated at 1.80% of an account's average annual Net Assets and is based on a projected 1,200 roundturns annually per $1 million of client assets. Equity drawdown limit. In the event that, at the close of business on any business day, the Net Asset Value of a client's account is 50% or less of the initial Net Asset Value of the account, Arch Capital may, at its discretion, liquidate open positions in the account. In that event, Arch Capital may at its discretion terminate the client's account or seek further instructions from the client with respect to termination of, or the infusion of additional funds into, the account. Because of varying market conditions, no assurance can be given that an account terminated under this provision will receive 50% of its initial value; it may receive less. Stops. The Advisor intends to use stops to attempt to limit trading losses in its largest positions. The Program's models were designed with stops in mind and the exact manner in which they are implemented have been determined after thorough evaluation during the model development process. Smaller trading positions may not employ stop protection as they represent a lesser risk to the client's account. Position Size. The Program's contract limits (the maximum number of long or short positions allowed in each market) are solely determined by the equity in the account. This feature helps to manage Program risk as it results in reduced position sizes during losing periods. Pyramiding not used. Arch Capital will not employ the trading technique commonly known as "pyramiding," that is, using unrealized profits on existing futures positions as margin for the purchase or sale of additional positions. However, it may add to existing positions when such action is dictated by its trading methodology. Arch Capital includes unrealized profits in its determination of account equity, which forms the basis for decisions on account position size. The trading strategy and account management principles described here are factors upon which Arch Capital will base its trading decisions. The factors discussed above may be revised from time to time by Arch Capital as it deems advisable or necessary. Accordingly, no assurance is given that all of these factors will be considered with respect to every trade or recommendation made on behalf of a Program account or that consideration of any of these factors in a particular situation will lessen a client's risk of loss or increase the potential for profits.