Alterama, Inc.
presents
Investing with a Future:
An Introduction to the Futures Market

FUTURES CONTRACTS - MANAGED FUTURES - TRADING SYSTEM - BENEFITS OF MANAGED FUTURES - INVESTMENT OPPORTUNITIES

By just opening this brochure, you have taken a major step towards understanding the most exciting and often profitable form of investment: trading on the world's futures and option markets. This brochure will dispel the myths sometimes associated with currency and commodity transactions; it will show just how great the profits can be; it will outline the major risks that must be faced. Alterama is committed to educating all its clients because we believe that only by understanding these markets will they properly benefit from the extraordinary returns that these markets can offer. There are many advantages to trading in Futures. One of the greatest is that investment in these markets can complete the diversification of your portfolio. After all, Futures are not bound to the performance of the stock markets, interest rates or inflation. Nor do you have to take the long term view: from time to time, the markets are so favorable that you can open and close a position in the same day and make a profit, and these profits can be made in both rising and falling markets.

2.0 FUTURES CONTRACTS

2.1 The Basics A Futures contract is a standardized binding agreement to buy or sell a specific commodity, precious metal, currency or financial instrument for a future date, at an agreed price, fixed on the floor of an organized exchange. This legal obligation can be fulfilled by the delivery of the commodity and the payment of the full contract price (sometimes fulfillment in cash). In general to offset your position in the futures market, you need only to find a substitute buyer or seller. You do this by giving your broker an equal but opposite order to your current position. Only about three percent of futures contracts are actually delivered. Traded options on futures give the buyer the right, but not the obligation to buy or sell a specific contract, at a specific price, until a specific date. A call option purchases the right without obligation, to buy a futures contract. A put option purchases the right, without obligation, to sell a futures contract. The price paid for the option -"premium"- is the maximum risk. Historically the increased use of futures by speculators makes the market more efficient and actually reduces price fluctuations. Without active involvement of speculators, buyers' and sellers' price difference (the bid and offer price spread) would widen and for example, the consumer would have to pay higher food prices to compensate for the risk of violent price swings resulting from temporary gluts or shortage. The speculators assume the risks associated with fluctuating prices and thereby protect "hedgers" in the hope of a profit.

2.2 Leverage Each Futures contract requires just an initial margin to be deposited. Initial margins usually range between 5% and 10% of the total value of the contract. This leverage factor is probably the best in all financial instruments. You can therefore take a substantial position with the prospect of large gains for only a small deposit (although the potential for loss is equally large). For example, a Swiss Franc futures contract with a total value of US $87,500.00 can be bought or sold with an initial margin of US $1,980.00. This means a 1-% movement in the price of the contract (representing US $ 875.00) gives a profit or loss of 44% on the deposit.

2.3 Profits from Falling as well as Rising Markets Trading Futures contracts can generate a profit from movements in markets whether they are up or down. Potential profit-making positions are virtually always available; it is just as easy to profit from falling prices as it is from rising prices. As the Futures Markets are continually trading in these contracts of future obligations, the contract itself will be traded at different prices between the date of its initiation and the date of expiration. For example, a contract may have a value of US $ 20,000: however, by the time it must be delivered its value might have risen or fallen depending on market demand. Should you anticipate a rise in prices, you would "go long" in that future (i.e. buy and then sell at the increased price). Conversely, if you anticipate a fall in prices you would "go short" (i.e. sell first and then buy back when prices have fallen, thus taking the difference in price). Because it is possible to trade on both rising and falling markets, there are always opportunities to be taken advantage of.

2.4 Price Trend Forecasting The Fundamental Analysis is the study of basic, underlying factors, which will affect the supply and demand, and hence the price of a futures contract. The accuracy of Fundamental Analysis often hinges on fast changing information-much of it is not easily obtained, nor can it always be accurately interpreted. Fundamental Analysis can provide the overview, the Big Picture. This type of analysis is long-term in nature, while most futures trading tends to be short- to medium-term. The Technical Analysis deduces its prognostication of futures price trends solely on the analysis of price activity. Past price action can provide clues as to future price action. Technical traders may use computer software programs to follow pricing trends and perform quantitative analysis.

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3.0 TRADING SYSTEMS

Trading systems are based on the fact that by using a systematic approach to buying and selling that is thoroughly tested on historical data-real price data and real market conditions- you are much more likely to make money that if you trade on intuition. The method must prove its merit from an objective, scientific point of view and therefore, be definable completely in straightforward, logical rules that a computer can master. To be profitable in the future, the system must have been tested with a minimum of curve fitting. Systematic traders believe that back testing and analyzing patterns-and eliminating emotions-are the only foundation for solid returns. By incorporating sound rules of Money Management, any sensible system will eliminate the prospect of ruin and allow you to be part of the next opportunity for profit.

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Chapter 2 Managed Futures: An Alternative Investment Opportunity

1.0 A GROWING INDUSTRY

The term Managed Futures describes an industry made up of professional money managers known as commodity trading advisors (CTAs). CTAs are regulated by the Commodity Futures Trading Commission and the National Futures Association. These trading advisors manage clients' assets on a discretionary basis using global Futures Markets as an investment medium. Managed Futures have been used as an investment alternative by high-net-worth individual for more than 20 years. More recently, institutional investors such as corporate and public pension funds and banks have made managed futures one segment of a well-diversified portfolio. More that $30 billion are under management by trading advisors. The acceptance of Managed Futures by these investors may be due to increases institutional use of the Future Markets for risk-management programs. Portfolio managers have become more familiar with financial-based futures contracts. Additionally, investors want greater diversity in their portfolios. They seek to increase portfolio exposure to international investments and nonfinancial sectors, an objective that is easily accomplished using global Futures Markets.

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2.0 BENEFITS of MANAGED FUTURES

Managed Futures, by their very nature, are a diversified investment opportunity. Trading advisors have the ability to trade in over 50 different markets worldwide and are often diversifying with different trading approaches.

2.1 Reduced Portfolio Volatility Risk The primary benefit of adding a managed futures component to a diversified investment portfolio is that it may decrease volatility risk. This risk-reduction contribution to the portfolio is possible because of the low to slightly negative correlation of Managed Futures with equities and bonds. One of the essential tenets of Modern Portfolio Theory is that more efficient portfolio can be created by diversifying among asset categories with low or negative correlation. This can be especially true during times of high valuation of the Stock Market.

2.2 Potential for Enhanced Portfolio Returns Not only can the inclusion of Managed Futures decrease portfolio risk, but also it can also simultaneously enhance overall portfolio performance. This is substantiated by an extensive bank of academic research, beginning with the landmark study of Dr. John Lintner of Harvard University in which he wrote that "the combined portfolios of stocks (or stocks and bonds) after including judicious investments…in leveraged managed futures accounts show substantially less risk at every possible level of expected return that portfolios of stocks (or stocks and bonds) alone."

2.3 Ability to Profit in Any Economic Environment Managed Futures trading advisors can take advantage of price trends. They can buy futures positions in anticipation of a rising market or sell futures positions if they anticipate a falling market. For example, periods of inflation, hard commodities such as precious metals, oil, grains and livestock tend to do well, as do the major world currencies. During deflationary times, futures provide an opportunity to profit by selling in a declining market with the expectation of buying, or closing out the position, at a lower price. Trading advisors can even use strategies employing options on futures contract that allow for profits potential in flat or neutral markets.

2.4 Ease of Global Diversification The establishment of global futures exchanges and the accompanying increase in actively traded contract offerings have allowed trading advisors to diversify their portfolios by geography as well as by products. Managed Futures accounts can participate in at least 50 different markets worldwide, including stock indexes, financial instruments, agricultural and tropical products, precious and nonferrous metals, currencies, and energy products. Trading advisors thus have ample opportunity for profit potential and risk reduction among a broad array of non-correlated markets.

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3.0 INVESTMENT OPPORTUNITIES

3.1 Individual Accounts They represent about 44 percent of all managed accounts. Institutional or high-net-worth individuals usually open them. These accounts require a substantial capital investment so that the advisor can diversify his trading among a variety of market positions. Management agreement terms may include specific termination language and financial management requirements to customize the account to investor's specification.

3.2 Private Pools This type of account commingles money from several investors, usually into a limited partnership. Most of these pools have minimum investments ranging from approximately $25,000 to 250,000. The main advantage of private pools is the economy of scale that can be achieved for middle-sized investors. Offshore futures funds are offered to non-U.S. resident investors.

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