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Program Description:
Objective
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Crescent Bay Capital Management's
trading programs seek to generate
high risk–adjusted returns
in both up and down markets
through trading in selected
commodity interests. Crescent
Bay Capital Management relies
on proprietary systematic trading
models that its principal has
extensively developed and tested
in-house. These models
operate 75% systematically and
25% discretionary.
The trading methods applied
by Crescent Bay Capital Management
are both proprietary and confidential.
As a result, the following discussion
is of necessity general in nature
and not intended to be exhaustive.
Crescent Bay Capital Management
intends to regularly evaluate
its trading methodology and
retains the discretion to revise
any method or strategy, including
the technical trading factors
used, the commodity interests
traded and/or the money management
principles applied. Such
revisions, unless deemed materials,
will not be made known to clients.
Crescent Bay Capital Management's
primary goal is to generate
consistent and positive returns
while limiting draw-downs and
volatility. Their secondary
goal is to maintain a low degree
of correlation with respect
to other Commodity Trading Advisor
("CTA") programs,
hedge funds, S&P 500 index,
and investment benchmarks in
general. The Advisor attempts
to accomplish this secondary
goal by employing trading methods
that it believes are different
from those of other investment
managers thereby offering investors
an approach that may not already
be represented in their portfolios.
Investors have long turned to
CTA's for diversification
but in the view of the Advisor,
emulating other CTA's does
not increase diversification
within the sector.
Balanced Volatility Program
(BVP)
The objective of the Balanced
Volatility Program is to achieve
substantial capital appreciation
through the speculative trading
of options on futures contracts
using “Non-Directional”
proprietary strategies. A secondary
objective of the Balanced Volatility
Program is to offset volatility
risks, which are inherent in
short option or premium selling
programs, while offering the
benefits of an absolute return
strategy. The Balanced Volatility
Program works well as a hedging
tool when combined with a premium-selling
program such as the Premium
Stock Index Program or as a
standalone investment.
It is well documented that selling
premium (short options) is profitable
in quiet or low volatility markets,
however, when volatility increases
sharply, many months or even
years of profit can be lost
if risk is not properly managed.
The foundation of the strategy
used in the Balanced Volatility
Program blends various short
and long options to create an
overall position that is buffered
from increases in volatility.
Furthermore, positions are strategically
placed across different calendar
months providing an overall
net long volatility position.
These core elements combined
with a robust adjustment protocol
result in a balanced strategy.
Positions are placed using proprietary
strike level and ratio algorithms
to achieve a strategy that can
be profitable in flat or volatile
market conditions. Stop limits
derived as a function of account
value and real-time monitoring
of positions are the primary
risk controls. Furthermore,
the Balanced Volatility Program
only participates in high liquidity
markets (currently the S&P
500 E-mini and Pit option contracts).
Premium Stock Index Program
(PSIP)
The objective of this strategy
is to achieve capital appreciation
through the speculative trading
of option on futures contracts.
This objective can entail a
comparatively high level of
risk. Crescent Bay Capital
Management currently engages
in this strategy of selling
or “writing” put
and call options on stock index
futures. However, in the
future, the Advisor may trade
a broader portfolio of options
and futures contracts, including
agricultural, metals, currencies,
and financial instruments.
Each of Crescent Bay Capital's
clients will receive advance
notice, before having their
account traded in any other
type of commodity interest other
than the stock index futures
and options. Crescent
Bay Capital Management may trade
commodity future and option
contracts on any United States
exchange.
Crescent Bay Capital's option
strategy collects premiums by
writing (selling) out-of-the-money
options. The seller (writer)
of the option risks losing the
difference between the premium
received for the option and
the price of the underlying
futures contract. Trades
are usually made 30-45 days
from expiration. The goal
is to exit the positions before
expiration at an “opportunity
cost” profit stop.
This profit stop is based on
the logic that underlying futures
moves can accelerate the profit
potential of the position.
For example, if an option is
sold 40 days out from the expiration
date and a market move occurs
which results in a 70% profit
after only 5 days, the position
would be covered and the profit
realized. This allows
for the sale of a new option
(still 35 days out from expiration)
and the opportunity for increased
returns, rather than waiting
35 days to capture the remaining
30% of the initial premium.
What makes Crescent Bay Capital's
strategy unique is that historical
prices are not used to establish
positions, and a short-term
trend indicator is used to help
reduce the probability of selling
options against a negative trend.
The majority of methods used
by advisors are based on the
assumption that historical price
data can predict future prices.
While the use of historical
price data has shown to be profitable,
the Advisor believes deeper
draw-downs and lower accuracy
are generally the result of
this type of analysis.
Crescent Bay Capital uses the
future perceived value in its
proprietary algorithms, derived
from the current month option
expiration, to determine the
strike price at which options
are sold. In addition,
position sizing methods are
employed to optimize risk-adjusted
returns by balancing put/call
exposure.
The profitability of a trading
system consisting of selling
(“writing”) uncovered
options on an index depends
on the price movement of the
index. If the Advisor
writes calls on an index, and
the calls are not bought in
before their expiration, the
strategy will be profitable
if the index is below the strike
price of the call when the call
expires. If the index
is above the strike price of
the call when the call expires,
the strategy may produce a potentially
unlimited loss.
If the Advisor writes a put
on an index, and the puts are
not brought in before their
expiration, the strategy will
be profitable if the index is
above the strike price of the
puts when the puts expire.
If the index is below the strike
price of the puts when the puts
expire, the strategy may produce
an unlimited loss.
In order to manage risk and
mitigate losses, Crescent Bay
Capital will attempt to buy
back (cover) options before
expiration if stop loss levels
are exceeded or will take a
position in the underlying futures
contract when extreme volatility
conditions arise. This
underlying position hedges against
additional position risk until
volatility diminishes.
The descriptions above are from
the manager’s disclosure
document.
THE RISK OF LOSS IN TRADING
FUTURES, OPTIONS AND OFF-EXCHANGE
FOREX CAN BE SUBSTANTIAL.
PAST RESULTS ARE NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
PLEASE READ THE CTA'S RISK
DISCLOSURE DOCUMENT CAREFULLY
BEFORE INVESTING MONEY.
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