Investment Management Questions  

Describe your investment philosophy in detail.

·        Markets are deemed bullish, bearish or moving sideways and indicators are adjusted correspondingly.

·         Indicators are generally oscillating or trend following and are tools of what has happened in the market. Therefore buy and sell signals are anticipated rather than chased.

·        Assets should be actively managed.

·        Heavy emphasis is placed on the exit point.

·        Short-term gains need to be kept in perspective.

Which Rydex Funds are eligible for inclusion in this model?

·        Rydex Dynamic and Index Funds

·        Rydex Money Market or U.S. Government Bond Fund

How much money do you have in this model?

·        Up to $3 million

On a scale of 1 to 5 where would you rank this model in terms of its aggressiveness?  1 being conservative, and 5 being aggressive.

·        5

Would you describe this model as a systems model, discretionary model or combination?  Explain

·        Systems model with discretion of which indicators to apply to current market condition.

Would you describe this model as technical, fundamental, monetary or a combination?  Explain

·        Technical

·        Technical indicators and data are used to determine direction of trading, trigger points, objectives and exit points.

What Indicators do you use to make buy and sell decisions and which of these indicators have the most influence over those decisions?

·        The program is named “Premium” because the best of the best market signals are used which have been successfully traded in the past.

·        Moving averages and oscillating indicators have the most weight.

·        Seasonality, gaps, volume, patterns, trading bands, resistance, and support levels are taken into consideration for confirming an entry, objective and stop loss point.

How do you differentiate between high and low confidence in an indicator and how does this influence the size of the allocation within a given fund?

·         TCM Premium program is a Market Timing program where 100% of assets are used per position.

·        More caution is used during transitional periods in the market.

Why did you choose these indicators as the basis for your model?  Are they supported by any academic work, internal or external research?

·      The goal was to have above average returns in all types of markets.  Combination of indicators is needed to perform well in the current market condition.  As the market characteristics change the indicators need to be weighted and adapted.

Do your indicators and the influence of the indicators within the overall model ever change?  If yes what would trigger a change?

·        Yes.  An example of signals testing out over the last twenty years indicating a 100% expectancy of a market rally on certain trading days of the month.  These signals became false and could no longer be weighted in for investments decisions.  Unless these particular signals become true again, they will not be used.  Positions may not be taken on the signal but taking positions against the signal may be avoided.

What types of market environments are favorable for your model and what types of market environments are unfavorable for your model?

 

·        Trending and oscillating markets work best.

·        The model may become unfavorable during transition periods in the market.  Normally this would mean adjusting the indicators to fit the new market condition.

On average how often are you trading or rebalancing on an annual basis?

·        TCM Premium is monitored and traded on a daily basis as needed.

·        The frequency of trades depends on the percentage movement of the market and not necessarily a time period.

·        The more volatile the market the more frequency of trades may occur.

Do you have capacity limitations for this model?  What are they?

·        No.  The limitations would be the limitation of Rydex and the liquidity of the exchange Rydex is executing the orders to adjust positions.

Do you have a targeted rate of return for this model on an annual basis?

·        The objective of the TCM Premium program is to outperform the S&P 500, but in a large way.  This program is managed to go beyond the 7-20% conservative return and seek to get high double if not triple digit returns. The program is concentrated to perform during bear periods in the market.  The Rydex two beta Dynamic Funds are used with 100% of assets invested both long and short with concentration on the short side.  Every effort is made to eliminate risk and stay on the right side of the market and in cash during periods of uncertainty and conflicts of indicators.  The program is an alternative to a buy/hold strategy and hedge during periods of a bear and flat markets.

What is your performance benchmark?

·        S&P 500

How has your portfolio performed relative to this benchmark?  Can you provide some insight regarding any over or under performance?

·        The program has outperformed the S&P 500. As long as we have movement in the markets this program should continue to out perform the S&P 500.

How long have you been utilizing the strategy or a similar strategy employed by this model? 

·        1992

How long did it take you to develop the model? 

·        13 years

How do you avoid the problem of over fitting in your model design?

·        Continuing to simplify the process.

Will you ever override your model and if so why?

·        Yes.  If 4-5 strong signals are generated in a row with each one becoming a stop loss that accumulates into a double digit draw down.  Assets will be placed in the money market funds until the system is back in synch with the markets. 

Do you analyze past trades to see why they worked or didn’t work in this model?  What did you find?

·        Yes.  A goal of the program is to perform well in all market conditions.  What has been found is the program performed poorly in whip saw markets that gap from close to open and open to close several days in a row.  The program was set up to quickly adapt to do well in bull, bear and sideways markets.  Whip saw markets are generally an indication of extreme uncertainty.  If the program is out of synch or cut-off times eliminate the ability to take advantage of the inter-day movements, then holding the position in the money market has become the best alternative.

Does your model evolve?  How?

·        Yes.  Market environment is constantly changing.  The indicators used must be quickly adapted and weighted for the current market condition.  Indicators such as momentum, market stats, market tempo, and conflict of signals give indication conditions are changing.

What is the source of the market data you utilize?

·        Dial Data

·        DTN

·        TC 2000

·        Ameritrade Advanced Analyzer

What software applications do you use to test your models and do research?

·        Meta Stock

·        Excel

·        TC 2000

·        DTN

Risk Questions

Do you consider your model to be conservative, moderate or aggressive?

·        Regarding allocation – The TCM Premium program is a market timing program with 100% of assets invested per position which may be considered more aggressive than a dynamic asset allocation program. 

·        Regarding management - The TCM Premium program is aggressively managed on a daily basis, but I would consider it more conservative than a passive buy/hold strategy. 

·         Regarding market exposure - Time is spent in the money market funds which eliminates market risk exposure.  This is more conservative than a buy/hold strategy.

·        Regarding return - The program is intended to generate above average market returns and high returns are generally associated with risk and aggressiveness.

How do you define risk?

  ·        Draw down and volatility

How do you control risk in the portfolio?

·        Limit losses

·        Limit losses

·        Limit losses

·        Once a position is taken, you have good indication by confirming indicators and market action if it’s a good position.  If not, the position is exited as quickly as possible.

·        Use the money market as a safe haven.  Positions exposed to the market are risk.

Do you have any specific money management and risk control rules?  Will you ever deviate from those rules?  Why?

·        Stops are executed if markets move against position for two days.

·        If a position is entered in anticipation of several signals that are confirming the market reversal and the movement is less than 1-2%, the position may be held for the reversal of the market, especially if funds were in cash and the position would still be taken at that moment.

What do you feel is the worse case scenario in terms of maximum drawdowns for this model going forward?

The program has suffered a 60% draw down during an extreme daily whipsaw period after having a 75% run.  Stops losses where properly executed and the losses came back to back.  The Venture funds were having 10 to 15% swings in a day.  The objective is to keep the losses within a 20% range.

Do you utilize any optimization techniques in your model?

·        Optimization is checked in back testing position to see if the signals have been properly executed.

·        Optimization of indicators is used to match the character of the underlying vehicle.

To what extent do you use cash? What is the minimum and maximum amount of cash you would hold? Under what conditions would this position fluctuate?

·        Money markets are used when not long a position.

·        Money Markets are used to clearly view the markets and execute quickly when a trigger point is hit.

·        Money Markets are used during times of uncertainty.

·        Money Markets are used after a stop loss and anticipation of a signal.

Do you have any client accounts directly with Rydex that implement a similar strategy to this model and have a longer track record?  Will you provide me with the account number and give us permission to have the account audited for further evaluation?

·        The TCM Premium and TCM Synthesis have real accounts being managed and identical execution of trades as the Schreiner Capital Selective Advisor tracking programs.