Crescent Bay Capital Management, Inc.

Crescent Bay Diversified Futures Fund, L.P.

The general trading strategy of the Crescent Bay Diversified Futures Fund, L.P. (CBDF Fund) combines a proprietary hedging technique referred to as “Positive Delta Neutral” with a balanced premium selling strategy. The CBDF Fund sells “out-of-the-money” options (puts and calls) on futures contracts and collects the premiums. Trades are usually made 30-45 days before expiration, but rarely held to expiration. Short positions are covered when profit targets or stop-loss limits are triggered. The concurrent Positive Delta Neutral hedging technique provides an overlay designed to reduce the risks which are inherent with options premium selling. The CBDF Fund achieves this by carrying “long” positions in the underlying futures contract and deferred put options “near-the-money.” Proprietary algorithms are used to determine strike prices of options sold and purchased, resulting in a high probability for trades to achieve profit objectives. The CBDF Fund goal is to be profitable regardless of market direction. In addition, a short-term trend identifying system is used to reduce the probability of selling options in the midst of a strong market trend. Risk is managed through daily evaluation of SPAN Margin used in conjunction with percentage of equity per trade limited to 2%. None of the CBDF Fund performance hangs on an index value. Our models derive pure alpha from selling risk and controlling risk using proprietary strategies. In short, we are educated sellers of insurance to other market participants while simultaneously insuring ourselves through use of the Positive Delta Neutral overlay.