Pardo Capital Limited

XT99 Diversified

The objective of PCL's trading program is to achieve rates of return on invested capital that are somewhat greater than those available from other investments, while taking reasonable steps to protect capital relative to the rates of return sought. No assurance can be given that this objective will be met, and an investment in an account to be traded by PCL should only be considered by individual and institutional investors that can assume the significant risk of commodity futures trading, including losses in excess of their initial investment. PCL will attempt to accomplish this objective by following the trading methods set forth below. B. Trade Selection 1 . Systematic and Discretionary Trading Approaches Commodity traders may generally be classified as either systematic or discretionary. Systematic traders will typically make their trading decisions by relying primarily on trading programs or models which generate trading signals. Although the system utilized to generate trading signals may be changed from time to time (although generally infrequently), the trading instructions generated by the then current systems are typically followed without significant additional analysis or interpretation. Discretionary traders on the other hand -- while they may utilize market charts, computer programs and compilations of quantifiable fundamental information to assist them in making trading decisions -- make trading decisions on the basis of their own judgment and "trading instinct," not on the basis of trading signals generated by any program or model. 2. Technical and Fundamental Analysis In addition to being distinguished from one another by the criterion of whether they trade systematically or on the basis of their own discretionary evaluations of the markets, commodity trading advisors are also distinguished as relying on either "technical" or "fundamental" analysis, or on a combination of the two. Technical analysis is based on the theory that market prices reflect all known factors affecting supply and demand for a particular commodity and that the study of prices alone will provide means of anticipating future prices. Technical analysis requires a study of among other things: the daily, weekly and monthly fluctuations of prices, open interest and volume in an effort to predict the future course of price actions. These predictions are generally based on computer generated signals using mathematical relationships, pattern recognition or any combination of such items. As an example, one method of technical analysis might evaluate the following set of factors on a daily basis: (1) the condition of the commodity interest market in terms of whether it is a trending or non-trending market, (2) the volatility the commodity interest has developed in the past as compared to current volatility levels, (3) current trade volume relative to past volume, and (4) the overall state of the commodity interest market to identify the proper points for initiating positions or allowing increases in existing positions. Fundamental analysis studies external factors to the trading market that effect the supply and demand of a particular commodity interest in order to anticipate futures prices. Such factors include governmental policies, political and economic events, information related to weather conditions, crop conditions and the overall economics of a particular commodity interest. Fundamental analysis assumes that markets are imperfect, that information is not assimilated or disseminated and that econometric models can be constructed that generate equilibrium prices that may indicate current prices are not sustainable. As an example, with respect to an agricultural commodity interest, one fundamental factor that effects the supply of corn is the total acreage planted. The demand for corn consist of domestic consumption and exports and is based on such factors as the cost of corn in relation to the cost of competing products. Although technical trading systems are comprised of a series of decision rules, some trading decisions are of a subjective nature, such as the selection of futures markets traded, the expiration months selected, the time of liquidation or rollover from one contract expiration to another, and the temporary suspension of trading prior to news releases. These subjective considerations are reviewed by the trading manager and are important non-technical considerations in implementing trading decisions. 3. PCL's Trading Program PCL will make its trading decisions by employing a systematic trading approach that relies primarily on technical analysis. PCL will also rely, to a limited extent, on fundamental analysis in conjunction with proprietary methods concerning, for example, the addition or deletion of a particular futures market interest from its portfolio. While the fundamental decisions may substantially affect PCL's performance, its primary reliance is on technical and mechanical trading methods that are embedded in a trading environment referred to by PCL as the Platform. The PCL Platform embodies a diversified selection of purely mechanical trading models of a mathematical, technical nature. They provide, at minimum, buy and sell entries and exits. At maximum, they may also include reversal orders, various types of protective and profit-protecting stops, and price targets. The Platform offers diversification in at least these four different ways. by 1) market, 2) trading model, 3) variation of the style or orientation of a trading model, and 4) trading pace. The purpose of this degree of diversification is to attempt to 1) maximize profit, 2) minimize risk, 3) smooth fluctuations in the equity curve, and 4) maximize profit opportunities. Market diversification is achieved by selecting different futures market interests with the least correlation. For example, a portfolio of coffee, crude oil and T-bond futures market interests offers greater diversification than a portfolio consisting of Swiss Francs, Deutsche Marks and British Pounds. Trading method diversification is achieved by selecting a portfolio of various, different types of trading models or methods. For example, PCL may elect to use a portfolio of trading models consisting of a volatility breakout model, a moving average model and a range breakout model. Diversification by variation of the style of a trading model is achieved by using different trading models within a particular model "genre" or class which have "significant structural differences." For example, a three-model portfolio can be created with models that share a volatility breakout entry mechanism but differ in their orientation to the trend. One model may be indifferent to trend, one may trade in the direction of the prevailing trend, and the third may trade counter to the current trend. Diversification by trading pace is achieved by employing a portfolio of trading which each trade a different time horizons. For example, one model may exploit trading opportunities with a duration of hours, one may exploit trading events spanning a two-to-four day horizon, and the third may exploit events that span a one-to-three week event horizon. The methods included in the Platform include amplifications of some better-known trading systems such as the volatility breakout system and the range breakout system, as well as counter-trend systems, proprietary trading systems, and pattern-recognition based systems. A key feature of the Platform is its dynamic nature. It is an essential part of the PCL Platform that the "mix" of trading methods be changed in accordance with PCL’s proprietary methods as well as with regards to changing market conditions. All models and markets are under continuous observation and evaluation. Models and markets can and will be deleted and added in a periodic re-mixing of all components of the Platform on all of the four "diversification fronts." In addition, new methods are constantly under evaluation and development for future use. Furthermore, current methods are continuously evaluated and compared to new methods. Another unique feature of the Platform is the method used in its construction. All models are tested and built via Walk-Forward Analysis(. This is a reliable model development method that Mr. Pardo invented, pioneered and refined to its current form. Furthermore, all models are created with PCL's exclusive and proprietary model development technology. PCL is dedicated to continuous research. This will inevitably lead to enhancements of its testing methods and the Platform itself. New types of trading models are currently under exploration and will be added when completed. Enhancements to the current models are under exploration and will be introduced when perfected. Further diversification via additional domestic markets is under continuous evaluation. Diversification via foreign markets is also under exploration. A variety of artificial intelligence methods are under consideration for integration into the Platform and PCL's proprietary development methods. Whereas the main focus of PCL is technical and mechanical, it is possible that methods will be applied from other disciplines as well. For example, Mr. Pardo is versed in various discretionary trading methods that may be employed from time to time. One of PCL's overriding concerns is risk control. Towards this end, methods that blend mechanical and discretionary approaches are used to determine portfolio mix. A similar blend of methods are applied to the periodic evaluation of the trading models that compose the Platform. Furthermore, PCL reserves the right to override all trading models and Platform elements during trading conditions that are beyond the realm of normalcy caused by unforeseen political events, natural disasters, etc. Since the trading methods of PCL are based primarily upon a variety of trading techniques employed by PCL, as well as the experience and judgment of its principal, this description is, of necessity, general and is not intended to be exhaustive.