ARA Portfolio Management

Balanced

ARA was formed in 1992 by Mr. Arulpragasam to carry on the research and advisory activities begun in 1972 by Dr. Paul Cootner, then a professor of finance at Stanford University, and William L. Brown. The ARA Portfolio System is described as follows: 1) utilizes the a trend identification algorithm to identify price trends and their relative strengths for each commodity. The algorithm is purely technical in nature, requiring only historical price data. 2) uses a portfolio of 18 commodities which, because of the co-variance of their price movements, represents the optimum portfolio for this system. 3) mathematically determines the size of component portfolio positions based on market volatility and overall strength of price trends. 4) begins with a client-defined level of risk and constructs a portfolio to approximate that level. The portfolio of the ARA Alpha fund was designed to have an average volatility approximately equal to that of an unleveraged S&P 500 cash index. THE ARA INVESTMENT PROCESS ARA applies its systematic, trend-following model to a portfolio of Commodity Interests. The model generates buy/sell signals from a robust algorithm that has been successfully traded for three decades. There are six sub-models, each tuned to a different set of momentum parameters, effectively yielding both fast-reacting and slower-reacting trading decisions. At the end of each trading day, the ARA Model is run and current trading signals are generated by the six sub-models. The trades that result from the new sub-model signals, if any, are aggregated and are executed the following day. Intra-day stoploss limits are also calculated for the next trading session. The position in each Commodity Interest can range anywhere from fully long (i.e., all six sub-models long) to fully short. THE ARA MODEL The ARA Model: Utilizes the Phase I Model trend identification algorithm to identify price trends and their relative strengths for each Commodity Interest. The algorithm is purely technical in nature, requiring only historical data; Uses a portfolio of Commodity Interests that, due to the co-variance of their price movements, represents the optimum portfolio for this system; Retains the basic risk management concept employed by the Phase II System while further enhancing it to deal with situations in which individual position sizes may be limited by exchange regulation or thinly traded markets; Mathematically determines the size of the component portfolio positions based on the volatility characteristics of the individual Commodity Interests and the overall strength of the price trend; and, Begins with a pre-set level of risk and constructs a portfolio that will approximate that level. Uses stop-loss limits (introduced in 2004) to prevent out-sized losses during sudden large adverse market moves. The ARA Model is used to trade both the ARA Commodities and ARA Balanced Programs, although the ARA Balanced Program operates at higher leverage than the ARA Commodities Program and trades a different basket of Commodity Interests. The ARA Balanced Program portfolios have a weekly standard deviation threshold that is currently at 3.5% (approximately 25% per annum). In addition to operating at higher leverage than the ARA Commodities Program, it also trades a more balanced combination of non-financial and financial Commodity Interests. A managed account began trading on July 1, 2004 and a pooled vehicle, the ARA Balanced Fund LLC, is expected to be launched in the second half of 2004.