FX Concepts Trading Advisor, Inc.

Multi-Stategy

Program Description: The Multi-Strategy Fund employs various systematic strategies developed by FX Concepts for trading foreign exchange. Currently, the Fund employs two different trading programs: FX Concepts' Developed Markets Currency Program ("DMC") and FX Concepts' Global Currency Program ("GCP"). The Manager will periodically adjust the allocation of trading capital to these and other programs as new trading programs are added to the Fund. The multi-strategy format for this Fund began Jan 2002. In March 2002, DMC program was updated through the addition two additional strategies, the Yield and Options Modules. Prior to Jan 2002, this Fund featured the DMC Program, exclusively. A. Developed Markets Currency Program ("DMC") Program Description The Developed Markets Currency Program is an alternative investment strategy that produces superior risk adjusted returns by trading a diversified portfolio of developed market currencies in the interbank foreign exchange market. The DMC program has a continuous track record dating back to May 1988. Set forth below is a summary of the investment process upon which the program is based. Investment Process - Quantitative & Qualitative Elements Since its inception in 1988, the investment process and performance of the DMC program has been largely governed by a "Trend Module." In an effort to improve the durability of the investment process and returns, a "Carry Module" and an "Options Module" were added in the first quarter of 2002. As always, the core of the investment process continues to be quantitative and systematically driven by FX Concepts' proprietary trading systems. The Trend Module The trend module utilizes price action as the primary determinant in forecasting foreign exchange moves. In this module, analysis of foreign exchange rate movements is composed of three major components: trends, cycles, and volatility. Trend following analysis, the most technical component of our process, identifies the underlying trends of the currency markets. Cycle analysis aims to identify the time period/life span of a trend, i.e. when trends are likely to begin and end. The volatility component of the analysis relates to a risk management concept. In effect, the system uses volatility as a measure for gauging the probability of forecasting profitable trades and consequently determining the appropriate size of positions. As a result of periodic optimizations, the relative weighting of the currency pairs and the choice of currency pairs varies over time. Generally, a client's portfolio is constructed in a way that allows for a balanced representation of the major currency blocs of the developed markets. The current DMC portfolio includes eight currency pairs. 55% of the portfolio is allocated to trading US dollar denominated currency pairs. 45% of the portfolio is allocated to non-US dollar currency pairs. Long and short positions may be taken. The Carry Module This module exploits a dynamic risk allocation system to create a currency basket that identifies high and low interest currencies and the proposed positions. The positions are conditioned on a proprietary measure of the market's risk appetite. For example, when the market is risk-seeking the risk allocation is at the maximum. In the event that the market gets cautious, risk is reduced. And when the market is risk-averse, the positions are reversed. This conditional strategy greatly enhances the return-risk trade-off of the DMC program. The Options Module The options module takes advantage of the phenomenon that hedgers pay a premium to insure against currency risks through the implementation of an intelligent short volatility strategy. This module is designed to negatively correlate with the trend module by selling options positions against the underlying trend position. As a result, the strategy adds returns, controls risk and diversifies returns by making money during periods of consolidating trading - when other strategies suffer. B. Global Currency Program ("GCP") The Premise: A manager with a dynamic allocation system and a naïve modeling strategy should outperform a manager with a dynamic modeling system and a naïve allocation strategy. The Global Currency Program (GCP) is the latest plateau in our never-ending drive to extract maximum gains from the foreign exchange market. For years, systematic currency managers have focused their research efforts exclusively on improving their currency modeling techniques. We believe that the reservoir of untapped or undiscovered techniques that could improve the forecasting of individual currencies is limited. Although it is still important to have models that are profitable over the long term, the fastest route to improved consistency of return through research is not through efforts to build the perfect model. Instead, our recent research effort has centered on the following goals: 1. identify currencies with the greatest profit potential; and then 2. dynamically allocate capital to the best opportunities. Many currency managers claim that it is impossible to determine which model signals will be the most profitable or which currencies will be "hot" over any given period of time. Our research has proven that this can be done and its impact on improving the consistency of returns can be significant. It is more important to get the allocation right than to fine tune the model. A manager with a dynamic allocation system and a proven, time tested strategy should outperform a manager with a dynamic modeling system and a naïve allocation strategy. We have both. The System: Based upon a statistical analysis of foreign exchange price data and short term interest rates, the GCP investment approach is purely systematic. Its implementation consists of three steps: 1. individual currency forecasting; 2. lensing; and 3. portfolio construction. First, the system formulates individual forecasts of currencies based solely on the price action of each currency. Second, those individual forecasts are then reconciled with one another during the lensing stage. This stage can also be described as a cross market modeling process where forecasts from individual currency models are revised based upon an analysis of other related currencies and interest rate differentials. The foreign exchange universe is a giant, interconnected "web" of relationships. Our system searches the web empirically for all significant relationships, whether they are simple currency pairs, e.g. USD/JPY, or complex relationships such as the Singapore dollar versus a basket of Singapore's major trading partners. These relationships are analyzed simultaneously to create robust future predictions for all currencies in the web. The third and final stage of the process is the construction of a portfolio where the capital is dynamically allocated based on return/risk forecasts and a portfolio volatility analysis. The key to our approach is in treating currencies as separate asset classes. Utilizing multiple layers of statistical modeling techniques, we develop expected return and risk forecasts for each "asset class". Then, using mean variance optimization techniques, we build a portfolio that maximizes return per unit of risk. It should be noted that the optimization routine, which builds the portfolio of currency positions, is subject to several constraints - all aimed to further contain risk within boundaries. First, the notional position size for individual currencies is limited to a specified percentage of the underlying assets of the program. This percentage is higher for more liquid currencies and lower for more exotic currencies. In addition, the maximum amount of risk the optimizer is allowed to allocate across the entire portfolio is constrained to a fixed amount. Moreover, the overall leverage of the portfolio is limited. Our risk measuring techniques are "GARCH" like in that they are based on the theory that volatility has memory. We add additional forecasting techniques to account for the non-normal distribution of currencies, particularly in the case of currencies of less developed countries. The system also includes market liquidity analysis to account for the changing costs of entering/exiting a position in each currency. Several of our interbank counterparties are polled daily for bid/offer spreads, both spot and forward, in the currencies we trade. This entire quantitative process is run on a daily bas