TWR Management Corporation

The Relative Value Program

Program Description: Relative Value Analysis The advisor manages client accounts pursuant to its Relative Value Program ("RVP") by employing a trade decision methodology called "Relative Value Analysis." The trading methodology is discretionary, quantitative and stylistic. It is not systematic and it is not a trend following program. The stylistic approach that underlies the majority of trading is identifying potential movements in the "term structure pricing" of interest rate futures contracts of many different economies. The term structure pricing of interest rate futures is basically the spread between two or more of the futures contracts and/or the spread between futures and cash interest rates. This term structure pricing (the spreads), will move for a variety of quantitative and market force reasons such as price convergence, inefficient pricing, yield curve rides and changes in market expectations. Identification of which market forces might cause a change in the term structure pricing is accomplished in part by various quantitative models that perform a futures or options rich/cheap analysis, cash/futures spread evaluation (i.e., basis analysis), and intramarket and intermarket relative value determinations. "Intramarket" refers to futures contracts with the same underlying cash instrument but different delivery months, while "intermarket" refers to futures contracts with different but related underlying cash instruments. In addition to using quantitative models, trade decisions are also influenced by consensus economic research monitored by the advisor. Spread Trading In advising for the client accounts, the Advisor most often positions intramarket and intermarket spreads in order to capitalize on changes in the term structure pricing of interest rate futures contracts. A spread is the near simultaneous purchase of two related futures contracts. Profits and losses result from the relative price movement of the long and short positions. To illustrate, if the December Eurodollar futures contract is expected to appreciate in price relative to the March Eurodollar futures contract, a spread of long December and short March would be positioned. If, in this example, the December price falls by 20 basis points and the March price falls by 25 basis points, a gross profit of 5 basis points would be realized because December appreciated relative to March. If on the other hand, the December contract falls more in price than the March, a loss would be realized. Spread trades, such as the example, are selected based on quantitative and subjective determinations. The Advisor most often positions spreads for two reasons. First, spreads can insulate performance from some random and some non-projected market price influences that cause identical movements in both legs (sides) of the spread position. And second, spreads are used attempt to isolate market exposure to the projected change in term structure pricing of the contract. Risk Management As a market analyst, Mr. Rooke maintains opinions about the financial markets using both fundamental and technical analysis. Despite his experience in these two forms of price forecasting, Mr. Rooke developed Relative Value Analysis because in his opinion, the trades formulated are perceived to have better odds of profiting and may permit a market exposure that at times, could avoid certain market occurrences found to be costly with the other more traditional market approaches. Two of those costly market occurrences are the "Announcement Effect" risk and the "Whipsaw" risk. Managing The "Announcement Effect" Risk: One potentially costly occurrence in futures trading that the Advisor seeks to control with the RVP is holding futures positions through various economic releases and other "announcements." An economic report, Central Bank currency intervention or a signaled change in monetary policy are all examples of announcements that could significantly affect the performance of an investment or speculative position. The performance record of many financials advisors is dependent upon their ability to correctly forecast these kinds of announcements and, just as difficult, taking outright positions that might benefit them. Although positions taken by the advisor are always subject to the "announcement effect," for most trades profitability is purposely not dependent on them. Spreads have no less risk than outright futures positions and their reaction to the announcement there is no more predictable. However, based on the objective of selecting spreads that could be profitable in the absence of any announcement, the Advisor's market experience and given the often insulating benefit of a spread, the Advisor believes that Relative Value spread trading is its preferred approach to managing announcement risks. Managing the "Whipsaw' Risk: Another potentially costly occurrence in futures trading that RVP seeks to minimize is false signals that result in a "whipsaw." A whipsaw is a trade loss resulting from initiating a futures position just before prices reverse direction. Although a whipsaw can occur with all forms of market analysis (including Relative Value Analysis) it is most commonly associated with trend following or technical analysis. With many technical trading systems, profitability is dependent on catching a portion of a price trend. Typically, trends are detected once they have already developed and positions are exited once the trend has reversed. Since the Relative Value Analysis entry and exit signals are rarely generated from historic price trends, the Advisor theorizes that one cause for whipsaw losses may be eliminated.