Managed Futures Funds - Investor Updates
April 1997-September 1998
By Tom LaRocque

FUND 1
August 1997

August proved a difficult trading month for FUND 1. Many of the markets that had been profitable over the past two months experienced significant reversals. The net effect was a negative return of 2.06%.

Setbacks hit the equity and interest rate markets, while modest gains were made in isolated components of the food complex, and in Australian bonds. Much of August’s decline, it should be noted, represented retracement of increases made in July--one of the fund’s best months to date. August’s 4.2% drop in the S&P 500 followed an 8% rise in July.

Similar pullbacks affected financials. The nearby treasury contract retraced 2.8%, which sparked stop-loss selling and heavy trading in general. Fears of higher interest rates and inflation in the U.S., combined with speculation about German monetary tightening, were leading contributors to August’s losses. Trend reversals led to meaningful setbacks in the German bund, as well as the British gilt and French treasury bond. Australian bonds bucked the downward trend.

Currencies were flat to slightly down in August, and reversals proved less troublesome. The Deutschemark strengthened against the dollar, pound, and yen, due in part to expectations of higher German rates. Long dollar-yen trades were marginally profitable to some traders, as the yen sank along with Japan’s record-low interest rates.

Rising natural gas prices were among the portfolio’s bright spots in August. Gas rallied more 20% on signs that production might not meet estimates even as inventories dwindled. The energy complex otherwise declined. Commodities contributed to August losses, with the exception of a profitable short position in cotton.

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FUND 1
September 1997

Trading results were moderate and mixed in September. Choppy markets worldwide produced a gain of ___% for the month, reflecting the return of a more tranquil market following August’s volatility. Portfolio managers capitalized on a simultaneous rise both in debt and equity markets. Many traditional commodities declined, rewarding short positions and causing moderate long-position losses.

Financials accounted for the most significant gains. U.S. treasuries rose after the FMOC’s decision to leave interest rates unchanged. Australian, Spanish, and Italian bonds followed U.S. bonds upward. British bonds gained upon speculation that the U.K. will join Europe's Economic and Monetary Union earlier than expected. Japanese bonds contributed as well, on news of a contraction in Japan’s economy, lessening chances for a rise in Japanese rates.

Profits from stocks stemmed from the S&P 500’s 5.3% rise, while the French CAC 40 and British FT-SE each gained more than 7%. Setbacks resulted from short positions in the Hang Seng index (in premature anticipation of a collapse that came later, in late October). September brought sideways movement in currencies, with the Pound Sterling and Japanese Yen moving up slightly against the dollar. Among the month’s most profitable trades was the Mark/Yen cross, in light of Germany’s perceived economic strength and weakness in Japan.

Grain markets were generally flat in September. Declining coffee, sugar, and cattle prices rewarded short positions, while wheat futures reversed their prior uptrend. Elsewhere in the commodities, managers exploited on the continued rise in natural-gas futures, as tight supply and strong commercial demand heading into winter brought life-of-contract highs. Increases in crude and heating oil benefited long positions in late September.

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FUND 1
October 1997

October’s volatility in world equity and exchange markets brought a fractional loss of .94%. The month’s greatest drawdown, a negative 1.34%, came one day after the Dow Jones Industrial Average’s historic 555-point one day drop. Equities, however, were not a major factor in the month’s moderate losses, with declines mixed broadly among gains in several sectors.

Rates Rise, Stocks Fall

The Dow’s decline concurred with significant losses in the Hang Seng index, as investors lost confidence in Asian economies. European currencies declined along with the stock indexes, and the resulting reversals accounted for moderate losses. The British Pound Sterling was an exception, however, rising as the scales began to tip against the prospect of the U.K. entering Europe’s Economic and Monetary Union before the end of the millennium. At least one trader profited by staking a long position in the Pound Sterling versus the Japanese yen. Japan’s currency moved in a choppy, sideways direction against other world currencies.

Reversals plagued non-US interest rate markets, and many traders were stopped out of long positions in European bonds. Germany’s strong economy moved its central bank to raise short-term rates, its first increase in five years. Rate increases spread across Europe, wounding long trades in German, French, and British debt futures. U.S. treasury prices made moderate gains as investors abandoned stocks. Long positions in domestic bonds benefited from the “flight to quality,” and high-yield bonds contributed positively in October. Gold displayed little of its traditional appeal as a hedging tool, and was relatively insignificant in portfolio performance.

Export Demand Boosts Commodities

Natural gas was a significant gainer, as prices increased amid continuing concerns about dwindling supply, in contrast to choppiness elsewhere in the energy complex. Crude oil’s mid-month reversal caused losses. Corn, sugar, and soybeans increased steadily until a late month correction, partly on word of greater export demand. Results were mixed, as some traders played the rise successfully while others were caught short.


FUND 1
November 1997

Trading continued without drama or surprise in November, with significant gains in currency offset by scattered losses in choppy food, metals, and energy markets. Overall, the portfolio gained .56%.

The fall of the Japanese yen, nearly uninterrupted since June, accelerated in November with continued reports of weakness in Japan’s economy. The yen hit a six-month low against the U.S. dollar and five-year lows against selected European currencies. Shorting the yen against the dollar rewarded discretionary traders and trend followers alike. Moderate losses, however, were endured in the Japanese bond market, which chased the Nikkei stock index in a choppy upward pattern throughout the month.

U.S. bonds were more benevolent to the program’s long trades, rising on inflation fears and investor movement to safety. But a long anticipated “decoupling” of the U.S. stock and bond market still has not materialized. A major reversal in U.S stocks followed early-month selling, producing losses. The S&P 500 finishing up by --- % in November, following October’s slide. When stocks rebounded, even the Asian crisis was cited as a positive, helping the U.S. markets by slowing down the world economy and reducing inflation potential.

“Loss of Luster”

Short positions against gold and gold-related stocks produced profits. Gold’s steady decline, beginning in early October, continued through November, with futures and spot prices hitting 12-year lows. Analysts attribute the fall to concerns about selling by European central banks, and gold’s “loss of luster” as a hedge against inflation. Asia’s market turmoil has also dampened demand for the precious metal, threatening further price erosion.

The rise and fall of silver futures caused additional setbacks, with word of reduced demand in Asia. Palladium prices reversed downward as well, to the detriment of some traders. In food, cattle futures were a modest contributor to November’s profit, while whipsawing sugar markets sparked losses.

In the energy complex, natural gas prices fell by about 28%, rewarding short positions. Declining demand is blamed in part on concerns about El Nino, an event believed to cause temperatures above normal. Crude oil prices fell with the conclusion of the standoff in Iraq. Crude prices have dropped almost $4 since the highs made in early October, but without major consequence to November’s performance.

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FUND 1
December 1997

Fast and frequent reversals in world stock and bond markets brought little, if any, direct profit or loss to the FUND 1 fund. But December’s volatility set the stage for gains in other areas, particularly foreign exchange, as some currencies sank and others soared. Losses were scattered among isolated components of the food complex, as the fund enjoyed a net advance of 1.09%.

Japan’s economic woes have created a trend-following trader’s dream; the yen has plunged about 20% against major currencies since June. The slide continued in December, interrupted only by a minor mid-month spike when the Bank of Japan unveiled an economic-stimulus package including income-tax cuts. But the yen then resumed its slide, falling more than 5% in December alone, and benefiting most traders.

Asian Contagion

Japan’s woes have been both a cause and an effect of the so-called Asian contagion, which has been linked to volatility and setbacks in virtually all financial markets. The Asian problem has stemmed also from fear of a collapse of the South Korean economy. December’s announcement of a $55 billion rescue plan by the International Monetary Fund eased such fears briefly. Stocks and bonds worldwide then returned to their previous, wide up-and-down patterns as nervousness continued.

Profitable plays emerged in the currency arena, however, as the U.S. dollar took on the role of a perceived safe harbor. Long positions benefited, but one trader sustained a setback by shorting U.S. currency against the Australian dollar. Currency in Australia as well as Canada, both heavy exporters to Asia, have been hurt by the Asian crisis.

Declines Bring Profits

Another declining market that proved profitable was the energy complex. Falling prices for crude oil resulted from Iraq’s announcement of its attention to return to the world market as a supplier. Saudi Arabian producers said they will step up production as well.

Choppy markets for coffee and orange juice caused reversal-related selling, and setbacks. Traders in sugar, cattle, and cotton also sustained losses setbacks, as food commodities remained rangebound. Small gains were recorded in rising silver futures, which diverged from the plummeting price of gold; and in copper, which has advanced because of favorable fundamentals.

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FUND 1
February 1998

A month of nearly flat performance resulted from gains in energies, food, and stock-index futures, mixed with setbacks in currencies and certain commodities. Lacking the drama of other recent months, February reinforced the value of diversification, and of staking short positions in apparently-overvalued sectors, as profits materialized in many falling markets. Overall, the FUND 1 fund recorded a gain of .11%.

Energy futures continued their bearish tone, rewarding short traders, with crude oil hitting levels not seen since 1994. Reduced worldwide petroleum demand was blamed on economic conditions in Asia, and a warmer-than-normal winter due to El Nino. Additionally, with the easing of tensions in the Middle East, the United Nations recommended allowing Iraq to increase oil sales almost threefold.

Grains, Food Mixed

Profits accrued in soybeans and soybean meal, which fell sharply as the U.S. Department of Agriculture reinforced fears of record South American production. Another profitable grains-complex component was corn, which followed a ski slope pattern downward, with gains for trend-following short traders. A similar plunge brought significant profits in sugar.

Elsewhere in the volatile food-complex markets, conflicting reports about oversupply sent coffee futures tumbling, recovering, and tumbling again, to the detriment of frustrated trend followers. Cocoa bottomed, provoking stop-loss selling, while palm oil futures followed the group’s costly, frustrating whipsaw pattern throughout the month.

Nickel Rebounds

Unrealized profits accrued in industrial metals, particularly copper and aluminum. Losses were taken in nickel, however, which advanced 6.9% by mid-month, recovering from the three-year low it endured in January. In precious metals, long traders took profits in silver, which rose after news of a buying spree by investor Warren Buffett.

In the more “mainstream” markets, bonds rose steadily in Germany and Japan, but with little net consequence to the fund. U.S. Treasuries fell, bringing losses, as formerly frightened investors returned capital to equities. Mid-month rumors of hedge-fund selling, along with widespread belief that the Federal Reserve will not soon seek an interest rate cut, drove the 30-year benchmark Treasury’s yield to its lowest level since December. Stock index trading was marginally profitable, as the S&P 500 set 13 record highs with a 7% net advance.

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FUND 1
March 1998

Active European currencies and falling energy prices brought an overall advance of .76 percent in March. Adding to the gain were U.S. equities, in a month when the Dow Jones Industrial Average neared yet another historic milestone (eventually reaching 9,000 in early April). Losses hit traders in the European interest rates, as many investors departed bonds in favor of the soaring stock market.

As energy futures hit lows not seen in nearly a decade, the fund’s trend followers capitalized heartily both in crude and heating oil. Then came OPEC’s announcement of production cutbacks, sending crude prices from less than $14 per barrel to more than $17 in just a few days. The recovery itself was taken by many as a sign of support for stocks, even as low energy costs had been cited previously as a positive.

Stocks Soar

Nearly all the month’s equity gains came in domestic markets, in conventional S&P futures and in the newer E-Mini S&P 500 contract. Euro markets were lifted by Wall Street’s updraft, and by expectations of corporate mergers in Europe’s main industries, albeit with little direct consequence to the fund. Also fueling European stocks were a strong U.S. dollar and optimism about a successful European Monetary Union. In London, the FTSE 100 experienced a 225-point swing in one 15-minute period.

As Euro stocks rose, the British pound sterling strengthened, especially against the sinking Japanese yen. Unrealized profits accrued in the pound and in pound/yen cross positions, and short traders benefited further by the yen’s decline when a mid-month bribery scandal at the Bank of Japan lessened confidence in the Japanese economy. Meanwhile, the Nikkei index failed to participate in worldwide advances in equities.

Metals Mixed

Precious metals were another contributor to the month’s gains, in spite of volatile markets. Silver futures dipped and surged throughout the month, with waves of selling by mining companies mixed with buying by speculators amid rumors of tight supply. Gold was similarly lacking in direction until a profitable late-month dip, following the downward direction of palladium.

Industrial metals were another story, constituting the portfolio’s largest-losing segment. Copper futures, which have been falling along with the slowdown in Asia’s industrial economy, reversed upward on news of production cuts. Losses were also scattered among in the month’s choppy markets for lead, nickel, and zinc.

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FUND 1
April 1998

In a month of abrupt reversals in many markets, FUND 1 avoided losses of the magnitude hitting other traders in the industry. An overall setback of .64% stemmed from mid-month downturns in bonds, sparked by inflation and interest-rate concerns, mixed with success in grains and other agricultural commodities. Meanwhile, the Traderscan index of 73 managed-futures funds indicated an average decline of 3.49% for April.

Bonds were a complicated story, however, with one trader taking the month’s biggest gain in the U.S. 30-year T-Bond, while suffering greatest losses in the 10-year treasuries. While the two instruments’ charts moved in mostly parallel fashion, timely short-trading exploited the steep mid-month decline in the benchmark bond, but missed similar opportunity in the notes. The sell-off was attributed to increasing fear of an interest-rate boost by the Federal Reserve.

All-Time Low Yields

Bonds elsewhere, particularly in Germany and Japan, accounted for losses. The Japanese 10-year government bond rallied strongly; yields hit several consecutive all-time lows. The uptrend reversed, however, with expectations of economic intervention by the Japanese government, with a stimulus package includng tax cuts. The reversal brought stop-loss selling, and the surrender of profits accumulated in Japanese bonds’ preceding one-year climb. The German bund as well took a costly mid-month downturn, in the process dragging down Spanish, Swiss, and Italian interest rate prices.

Foreign exchange was another difficult market sector, and again the story was complex. The yen was driven upward by government-intervention rumors, while European currencies, especially the Deuschemark and Swiss franc, were aided by prospects of a successful European Monetary Union. The U.S. dollar index in turn was depressed by those factors. To one trader, nearly all the major movement in currencies brought losses, but another capitalized on the rising yen and mark.

Scarce Trends

Trend-starved traders found salvation in the grains, as corn and wheat prices fell on expectations of better weather. Sugar and cotton brought gains as well, as prices dropped to multi-year lows on concerns about oversupply. Increasing orange juice prices were profitable, but a similar rise in coffee punished short traders. A choppy, sideways market in soybeans brought minor losses as well.

The month’s wide range of losses included the volatile energies, as crude and heating oil rose and fell on news of tight world supplies, mixed with an anticipated reduction of U.S. forces in the Persian Gulf. A downtrend in silver, reversing the previous month’s steady climb, brought losses due to stop-loss selling.

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FUND 1
May 1998

Falling commodity prices played the biggest part in an overall advance of 1.38%, in a month when the CRB index fell 5% and sank to a four-year low. While world events shaped the mainstream currency, equity, and debt markets, much of the movement in May was due to relatively isolated factors affecting metals and energies.

Crude, heating oil, and gasoline prices all plunged on little more than word of oversupply, apparently unaffected by the sort of geopolitical complications seen in other recent months, with reduced tension in the Middle East. Falling energy futures did the most harm to fund performance in May, while declining metals did the most good.

Zinc Sinks
Short traders applauded as investors abandoned silver, mere weeks after having following the lead of long-term investor Warren Buffet, who had acquired significant hard reserves. Falling copper prices also rewarded short positions, as rioting in Indonesia triggered fears of reduced Asian demand. Zinc and aluminum fell as well, yielding minor profits. Coffee futures rose, to the detriment of the shorts, with concern about drought and a volcano in Central America.

Macro factors weren’t absent, of course, as Asia’s turmoil strengthened what were already some of the most profound trends in memory. Yields on the 10-year Japanese Government Bond set repeated records, now said by some to be at their lowest level in four centuries. Non-U.S. rates had little direct consequence, however, as traders missed the trend. Losses were taken in the more erratic market for U.S. interest rates.

Russian Rates Rise

The yen endured further indignity, sinking to a 7-year low against the U.S. dollar amid continued doubt about Japan’s resolve to ignite an economic rebound. Again short sellers cheered and the portfolio advanced. Currencies in general were another story, with the choppy Deutschemark and British pound necessitating stop-loss selling. The strong German mark faltered on news of a hike in Russia’s central discount rate. Often the two countries’ fates are tied together, because of geography and the belief that German banks face greater exposure to the Russian region.

In a month that reaffirmed the merit of diversification and the importance of short-selling, the FUND 1 Futures Fund slightly outperformed the Traderscan Index of 80 major managed futures funds, which reported an average gain of 1.13%.

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FUND 1
June 1998

Total asset value of the portfolio varied by less than 2% in June, a month in which world events could have caused much greater drama. Most significant on the world stage was the intervention in currency markets by the U.S. and Japanese governments, in a joint effort to prop up the weakened yen. The action sent ripples across many world markets, but with 34.5% of assets currently allocated to cash, the FUND 1 Futures Fund emerged from the storm with only minor effects—a .39% advance. The Traderscan Index reported an average gain of 1.09 percent in June, for 69 major managed futures funds.

Foreign exchange losses were not significant, in spite of the artificially induced reversal, for several reasons. First, the move resulted mainly in the surrender of profits accumulated earlier in the month, by trend-following traders with short positions against the yen. Looking farther back, the yen’s extended decline has been among the most profound and profitable trends in all contemporary markets, notwithstanding its large role in Japan’s economic misfortunes.

Quick Comeback

Second, the effects were relatively small and short-lived. Within days, market forces returned the dollar/yen exchange rate almost to its pre-intervention level. The reversal was enough to stimulate stop-loss selling, both by trend followers and discretionary traders. But investors worldwide may be interested less in non-fundamental factors such as government intervention, and more attuned to legitimate actions by the Japanese government to stimulate its economy internally.

Such actions, including recent plans to help Japanese banks eradicate bad loans, may have been a factor in the recovery of the Nikkei index, which rose 3% in the month’s last trading session. The rebound of stocks elsewhere, including the U.S. and Europe, was attributed to cautious optimism about Japan, recognizing that a strong Asian region is essential to world economic health. Stocks had minor effects on the fund.

Mixed Weather

Neither interest rates nor commodities escaped consequences of the intervention, with Germany’s soaring bond market emulating the recent rally in Japan, rewarding the long positions in the portfolio. U.S. bonds were helped by reassuring comments about inflation from Federal Reserve chairman Alan Greenspan. Another winning market segment was aluminum, as prices rose in reaction to perceived overselling in the recent past. Wheat, corn, and soybeans prices rose and fell, leading to losses, as claims of crop-friendly weather mixed with word of drought and heat damage.

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FUND 1
August 1998

August’s rising interest rate futures were played differently by different investors, with one FUND 1 trader enjoying a gain of nearly 10% by the month’s end while another saw declines of more than 5%. Overall, the FUND 1 fund generated a net gain of 1.85%.

Bonds soared as their yields fell to all time lows, in many cases, throughout the world. The move to the debt markets was widely attributed to the familiar “flight to quality” story, as equities moved sharply downward. Also behind the bond rally was an expectation by some investors of pending rate cuts by the U.S. Federal Reserve. Two of August’s most profitable trades were in the U.S. 10-year T-Note and the benchmark 30-year bond.

Asian Uncertainty

The recent, precipitous drop in stocks has been blamed on many factors including economic uncertainty about Asia and Latin America, fears of a slowdown in the U.S. and political turmoil surrounding the White House. In the month’s last trading day alone, the Dow Jones Industrial Average dropped 6.37%, closing at 7539, down about 20% from its July peak. Stock losses did affect fund performance, but in no greater degree than declines in several other market sectors, including the food complex.

Whipsawing coffee futures led to some of the month’s most significant setbacks, as commodity prices in general tested multiyear lows. The CRB/Bridge index of 17 commodities dropped to near 21-year lows amid global currency and devaluation fears.

Timely Trading

Losses were taken in cotton and copper, but a steady, month-long decline in soybean futures produced profits. Also contributing to the month’s overall advance were specific, timely trades in the energies, where crude oil prices were boosted by Saudi Arabia’s surprise announcement of production cuts.

In foreign exchange, losses were sustained as the yen’s lengthy decline reversed upward amid word of market intervention by the Japanese government. Conversely, the deutschemark sank, rewarding short traders, on worries about German banks’ high exposure to Russia’s troubled economy. Gains accumulated as well in short positions underlying the Swiss franc, which declined in response to the loss of its “safe haven” status among world currencies.

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FUND 1
September 1998

Rising interest rate futures and advances in selected commodities combined to produce an overall gain of 1.42%. The modest profit recorded by the month’s final trading session represented the peak in a remarkably steady September, in spite of turmoil affecting many markets worldwide.

Bonds moved steadily upward, mirroring the decline in stocks, as investors sought safety in tumultuous world markets. Fears of a global recession, disappointing corporate earnings, and an ongoing White House scandal were blamed for the trouble in stocks. But FUND 1 traders bullish on bonds profited as yields on many debt instruments hit historic lows.

Rate Reduction Disappoints

The rise of bonds was significantly interrupted only once, when comments by U.S. Federal Reserve Chairman Alan Greenspan were taken to portend a rate reduction. The cut did eventually materialize, in late September, but stocks sagged and bonds continued to surge. Many investors expecting a larger reduction were disappointed with a mere quarter-point cut in the federal funds rate. When the Bank of Canada followed the U.S. with a quarter-point rate cut, the Canadian dollar dropped sharply against world currencies, bringing losses.

U.S. equity futures traded in choppy fashion throughout the month, following their lowest close since January, on Aug. 31. In a single day, the Dow Jones Industrial Average spiked by nearly 5%, forcing one trader to withstand a 9% unrealized decline by only the month’s fifth session. But during the same five-day period, the fund overall fell only 1.8%, as other traders profited in bonds and commodities, thanks to fund’s diversity of trading styles and market positions.

Stronger Yen, Deutschemark

In Japanese markets, similarly, long positions on interest rate futures brought gains. Equities continued an extended downtrend, rewarding short positions, in spite of the announcement of Japan’s first interest rate cut in three years. Losses were sustained when the yen reversed upward against most world currencies, including even the strengthening Deutschemark, which is seen as a safe haven due to the Bundesbank’s promise of stable rates.

Energies staged an impressive recovery, adding to gains, and the rally continued into October. Brent crude topped $15 per barrel, after sinking nearly to $12, when Russian oil tankers were blocked by their own government. Shortfalls in worldwide petroleum demand have not materialized to the extent expected, according to analysts.

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FUND 2
April 1997


A generally sideways stock market brought small salvation in April, a period in which other markets suffered mostly reversals and losses. The fund’s overall setback of 5.16% stemmed from abrupt changes in entrenched trends, particularly in foreign exchange and European interest rates, while gains were recorded in Japanese bonds and German stocks.

Germany proved a factor in many markets, as its strong economy sparked word of a possible rate rise. Investors responded by bidding down bond prices in Germany and throughout Europe, until the Bundesbank’s late-month decision not to act sparked a bond rally. The damage had been done, however, as the portfolio endured interest-rate losses in Germany, France, the U.K., and the U.S. Timely trading in the DAX brought profits, seized before a mid-month correction due to the same fears that halted bonds.

Inflation Imminent?

U.S. bonds roughly followed the pattern of the Europeans, up, down, and back up, and were influenced by similar factors. Seemingly low inflation was bullish for bonds, while the rising U.S. dollar made all dollar-dominated securities more attractive to overseas investors. The rally unraveled, however, with increasing fear of a rate rise in the U.S., corresponding with German fears. Losses were taken in a robust mix of 30-year T-Bond futures and 5- and 10-year Notes.

Japan’s bond market was another story, and one of April’s few bright spots. The benchmark 10-year government bond’s yield hit several consecutive all-time lows, as investors embraced bonds over Japan’s weak currency and equity alternatives. The Japanese bond market was bullish, rewarding long positions, and even shrugging off unconfirmed talk that six trillion yen would be issued by the government to finance its economic-stimulus package.

Dollar Drops

The month’s largest losses came in foreign exchange, as the Duetschemark reversed upward, lifting the Swiss franc in its updraft. The yen approached seven-year lows against the U.S. dollar, but without major consequence to the fund. Dollar/yen trading grew choppy with talk of a Japanese stimulus package including tax cuts.

Significant losses hit short traders in live cattle, as futures rose to three-month highs, bolstered by word of a pending cash trade at a premium to market prices. Soybeans brought losses as well, as erratic prices necessitated stop-loss selling. Natural gas spiked and then fell precipitously upon reports of analysts’ concerns about storage.

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FUND 2
May 1997

Unsettling economic news in Asia brought gains, not losses, in a month that demonstrated the merit of short-trading in declining markets. The Japanese yen, sinking steadily throughout May, was by far the month’s most profitable segment, in a period bearing an overall advance of ___%.

The yen’s decline stemmed from factors both inside Japan and beyond its shores, as the embattled currency hit seven-year lows versus the U.S. dollar. Earlier in the month, speculation had the Bank of Japan planning intervention to defend its currency. But as that notion faded, turmoil in South Korea and Indonesia led investors to question the entire Asian region, impacting stocks and bonds as well as the currencies.

400-Year Low?

Yields on the 10-year Japanese Government Bond set repeated records, now said by some to be at their lowest level in four centuries. JGB prices continued an established uptrend, rewarding long positions. Non-U.S bonds were the month’s second most profitable group (after currencies), with scattered gains in European and Australian interest rates.

Third in profits was the stock-index group, with advances in the NASDAQ, NYSE, and S&P 500, as many investors sought sanctuary in U.S. markets. Germany’s strong economy drew attention as well, with modest gains in the DAX. Rumors swirled about rising German rates, as the Deutschemark rose against other currencies including the yen, yielding further gains in this very profitable month.

Germany, Russia Linked

But the German mark was beaten down later by negative news from Russia. Often the two countries’ fates are tied together, because of geography and the belief that German banks face greater exposure to the Russian region. A sell-off of the mark followed a hike in Russia’s central discount rate late in May, which fueled talk of ruble devaluation.

Other European currencies followed the mark downward. That most of the month’s profits came in currencies is more remarkable considering that significant losses hit the Swiss franc and British pound. First investors flocked to those currencies as a safe haven from Russian turmoil. But as Russia’s problems intensified, positions weakened, particularly versus currencies seen as stronger, including the U.S. dollar.

Setbacks in the grains complex were perhaps all that kept the fund from a double-digit monthly advance. Wheat futures reversed out of a downtrend, lifted by weather concerns. Corn and soybeans fell on news of near-perfect growing weather in the U.S., and selling by funds. Copper futures fell as well, when rioting in Indonesia caused concern that Asian demand for base metals will continue to wilt.

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FUND 2
June 1997

Intervention in currency markets by the U.S. and Japan sent ripples through many markets worldwide. The joint government effort to prop up the weakened Japanese yen was a short-lived success, with the yen spiking upward before returning nearly to pre-intervention levels. But the reversal was enough to almost erase early currency gains, with the fund recording an overall advance of .99%.

Selected equity markets rose, albeit in ragged fashion, on hope of a stronger Japan. German stocks gained the most ground, contributing significantly to June’s profits, helped also by the U.S. dollar’s strength against European currencies. Positive news on corporate earnings and mergers boosted the European markets, but concerns about reduced Asian demand remained a hindrance. U.S. stocks were another bright spot in June, but losses were taken in the volatile British FT-SE.

Deutschemarks follow dollars

While German stocks added to profit, German currency brought some of the month’s greatest setbacks. The Deutschemark sank, paralleling the fate of the U.S. dollar following the intervention effort in Japan. But while the Deutschemark’s fall was detrimental, a similar slide in the South African Rand rewarded short traders. Unrealized profits accrued in the declining Swiss franc, amid the global mix of skepticism and confidence about Japan’s resolve to repair its economy.

Interest rate markets brought mixed results, as U.S. bonds roared in response to reassuring comments about inflation from Federal Reserve chairman Alan Greenspan. Setbacks hit the choppy market for Australian bonds and 90-day bills, while the German bund strengthened, contributing to June’s modest advance.

12-year lows

Crude oil futures declined throughout the month, prompting talk of production cuts by OPEC. But even those rumors failed to rally support for oil, which hit a 12-year low and sparked fear of prices dipping below $10 per barrel—levels not seen since the oil bust of the early 1980s. The portfolio locked in profits on the decline before prices eventually rebounded, jumping $1.59 in a single day, bolstered in part by the recovering yen. Traders were less nimble in anticipating a reversal in natural gas, which rose on renewed demand due to a Texas heat wave.

Industrial metals and other commodities rallied in yet another response to governmental market intervention in Japan, which lessened fear of declining Asian demand. Aluminum and nickel rose, perhaps also in reaction to perceived overselling in the recent past, adding to June’s overall advance. The Traderscan Index reported an average gain of 1.09 percent in June, for 69 major managed futures funds.

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FUND 2
August 1997

Flight-to-quality moves by investors sparked rallies in interest rate futures, as equities plunged worldwide. The shifting of assets was good news for FUND 2 Futures Trading Ltd., as gains in bonds brought significant profits. Overall, an advance of 8.14% was recorded, in the fund’s best month since July 1997.

Record-Low Yields

As bond yields hit historic lows, interest rate futures rose both in U.S. and non-U.S. markets. The fund took significant gains in the German bund, Japanese government bond, and various U.S. debt instruments. One reason for the rally was an expectation by some investors of a cut in U.S. rates. More influential was the worldwide movement of investor dollars out of equities.

The month’s largest losses occurred in futures on the beaten-down German, French, and U.S. stock indexes. At the end of August, the Dow Jones Industrial Average was down approximately 20% from its peak in the previous month. The recent fall of equities has been attributed to many factors, including economic instability in parts of Asia and Latin America. Fears of currency devaluation, particularly in emerging markets, further propelled investors toward safety.

Currencies Follow Commodities

Foreign exchange produced mixed results, as world events extended some trends and reversed others. Among the bright spots was the Canadian dollar, which declined in response to a sagging commodities market. Many of the goods exported by Canada, including lumber and nickel, have been hit hard by fear of reduced Asian demand. Direct losses as well were taken in commodities, particularly copper and aluminum. The CRB/Bridge index of 17 commodities, meanwhile, fell to near 21-year lows.

Similarly affected, and nearly as profitable to the fund’s short traders, was the sinking Australian dollar. But losses were taken in short positions on the yen, which pushed tentatively upward on expectations of economic intervention by the Japanese government. The deutschemark fell due to German banks’ high profile in Russia.

Energies contributed to profit as crude prices were boosted by Saudi Arabia’s surprise announcement of planned production cuts. Added gains came from a minor rally in gold, which had been hurt recently by economic woes in Japan, a major gold consumer. A timely exit from the market for silver, following its July rally, also added to August’s 8% overall advance.

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FUND 2
September 1997

Early-month losses due to isolated trend reversals were erased later in September, as the fund salvaged a healthy 3.14% gain. Much of the advance was due to rising interest rate futures, as the yields of bonds worldwide hit historic lows. Gains in bonds, however, were offset largely by setbacks in foreign exchange, as investors fled certain currencies in a generally turbulent month.

Profits came both in U.S. and non-U.S. rates, as the Japanese government bond climbed higher along with the German bund, Italian bond, and British Long Gilt. Their move upward contrasted with the sideways and downward direction of most equity markets, as investors fled stocks, seeking quality and fearing a global recession.

Disappointing Rate Cut

Not even a U.S. interest rate cut, rumored early and confirmed late in the month, was enough to allay the fears. The one-quarter percent reduction in the federal funds rate, accompanied by no change in the discount rate, disappointed many investors who expected something more substantial. Similarly, a cut in Japanese rates, the first in three years, did nothing to prevent a substantial drop in the Nikkei index.

When the Bank of Canada followed the lead of the U.S. with a quarter-point rate cut, the Canadian dollar fell sharply against world currencies, leading losses that ranked among September’s largest. Similarly affected was the Australian dollar, with similar detrimental effects for the fund.

Moving to the Mark

Much foreign exchange capital moved to the Deutschemark, which is seen by some as a safe haven due to the Bundesbank’s promise of stable rates. Losses were taken in cross trades between the strengthening Japanese yen and the still stronger Deutschemark.

In commodities, profits accrued due to a steady decline in sugar, extending a slide that began in August. Investors expressed concern that political and economic turmoil in Russia—typically the world’s leading importer of sugar—will lead to a drop in demand. Gold and silver reversed upward, sparking setbacks, as investors sought safety from turmoil in stocks and currencies. Losses were also taken in the meats complex, particulary live hogs, as supply concerns forced prices upward.

Energy futures rose, with Brent crude oil topping $15 per barrel after recently sinking nearly to $12. Their ascent brought a small setback to fund, however, with some short traders betting on a continued bear market.

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FUND 2
October 1997

Against a backdrop of high volatility in world equity and exchange markets, the program concluded October with a fractional gain of .22%. In the month’s first three trading sessions, net value of the portfolio increased more than 5%, due to early rallies in stocks, grains, and natural gas. But at month’s end, profits and losses in virtually all trading contracts were moderate.

Rates Rise, Stocks Fall

The Hang Seng index fell 23.3% in a three-week period, as investors lost confidence in Asian economies. Stocks suffered worldwide, with the S&P 500 dropping 555 points in a single day, on October 23. Equity movements were not a major factor in October performance, producing only small losses due to declines in the British FT-SE and French CAC 40. European currencies declined along with the stock indexes. The Deutschemark and Swiss franc led the portfolio’s losers, detracting equally from October’s modest profit. Crossing the Deutschemark against Swiss currency proved unprofitable as well.

Germany’s strong economy moved its central bank to raise short-term interest rates, its first increase in five years. Rate increases spread across Europe, and the program sustained minor losses in German, French, and British debt futures. Declining Japanese bonds, however, were among the month’s most profitable segments, rewarding established short positions.

Markets Cheer U.K. Delay

U.S. treasury prices made moderate gains as investors abandoned stocks. Long positions in domestic bonds benefited from the “flight to quality.” Gold displayed little of its traditional appeal as a hedging tool, but contributed modestly to profit. The Pound Sterling gained as the scales began to tip against the prospect of the U.K. entering Europe’s Economic and Monetary Union before the end of the millennium.

Natural gas was the portfolio’s single greatest gainer, as prices increased amid continuing concerns about dwindling supply, in contrast to choppiness elsewhere in the energy complex. Corn, sugar, and soybeans also added to profit, rising steadily until a late month correction, partly on expectations of increased export demand.

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FUND 2
November 1997

November was a solid, steady period, with the program finishing in positive territory every day since the month’s second trading day. Profits were scattered, with modest advances in gold and copper, and more significant gains due to short positions against the falling Japanese yen. Losses were sustained in several components of the energy complex. Overall, a gain of ___% was achieved.

Yen Continues Downward

The decline of the yen, nearly uninterrupted since June, accelerated in November. Economic tension in Asia seemed to trigger a sell-off of the yen in favor of more stable currencies. The British pound, for example, increased by 7% against the yen, while the Deutschemark/yen cross rate improved as well. Both European currencies, traded against the yen, contributed to November’s profit.

Tokyo stocks moved in see-saw fashion thoughout the month, but without significant consequence to fund performance. Japanese 10-year government bonds, however, trended upward in erratic fashion, causing short-term losses.

Lost Luster

Established short positions in gold were rewarded as the precious metal’s steady decline continued. Futures and spot prices hit 12-year lows. Analysts attribute the fall to concerns about selling by European central banks, and gold’s “loss of luster” as a hedge against inflation. Asia’s market turmoil has dampened demand for the precious metal, threatening further price erosion. Declining copper prices also attributed to reduced Asian demand, and contributed modestly in November.

The program’s largest single losing segment was natural gas futures, which fell in price by about 28%. Declining demand is blamed in part on concerns about El Nino, an event believed to cause temperatures above normal. Losses were also sustained in crude oil, when prices fell with the conclusion of the standoff in Iraq. Crude prices have dropped almost $4 since their highs in early October. Unleaded gasoline and gasoil markets were choppy in early November, followed by a late-month decline and stop-loss selling.


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FUND 2
January 1998

January’s 1.08% gain came in spite of sharp reversals in Asian currency and equity markets, as Japan’s long-suffering economy showed signs of improvement. While the Japanese yen’s rebound produced the portfolio’s greatest losses, an additional setback was due to the declining Australian dollar. Gains were distributed among stocks, bonds, industrial metals, and energies.

The strengthening yen was attributed in part to renewed confidence in the Japanese economy, following last month’s announcement of an economic stimulus package. Faith in Japan was bolstered again in January with the resignation of key economic officials. Also boosting confidence in Asian countries were signs of their increasing interest in the International Monetary Fund’s rescue plan.

Asia Affects Australia

The effects of Asia’s economic woes proved far from conclusion, however. Declines in the currencies of Australia and Canada were blamed on the considerable exposure of exporters in those countries to struggling Asian economies. The sinking Australian dollar was one of January’s largest-losing segments. January also brought losses in the choppy British pound sterling market, which experienced two price spikes followed by significant declines. A similar price pattern in the German Deutschemark, however, brought profit to one discretionary trader.

Debt futures fell worldwide, producing mostly-unrealized profits for trend-following short traders. The decline of bonds was attributed to investors’ cautious return to equities following the squalls of late 1997, and to the continued absence of inflation signs. Advances were spread evenly among several U.S. debt rate instruments. The same factors may have accounted for the gains in German, French, and British bonds.

January Effect

Stocks were marginally profitable, with gains in the S&P 500 index. The DJIA concluded January a single point below its opening level, however, sparking speculation about the mythical “January effect.” An upward move in January, it goes, foretells a bull market for the year. Minor gains were also recorded in Spain’s IBEX 35 index.

Energies and industrial metals were solid contributors to January’s advances. Crude oil declined steadily amid news of oversupply, absent inflation, and the easing of tension in the Middle East. Short positions were rewarded as well by declining prices for industrial metals, particularly nickel, which fell to a 3 ½-year low because of reduced Asian demand.

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FUND 2
February 1998

February’s positive performance came in spite of losses in foreign exchange, as Japan’s struggling economy showed hints of pending recovery, bringing volatility to yen/dollar trading. Salvation was found in long positions in Japanese interest rates, however, which climbed steadily after a late-January plunge, and in selected European interest rates. Overall, a gain of ____ was recorded.

February brought relative calm, on the heel’s January’s turbulence, to world equity markets. The S&P 500 set 13 record highs while enjoying a 7% net advance. Stock index trading was generally profitable, with Japanese stocks the group’s only significant losing segment. The Nikkei index hit a V-bottom late in the month, and recovered with the announcement of more economic-stimulus action by the Japanese government.

Jump-starting Japan

As investors second-guessed the Japan’s ability to jump-start its economy, yen futures spiked twice against world currencies. The volatility resulted in costly stop-loss selling, with some traders taking losses on the increases as well as the declines. Volatile swings also brought losses to trend-following traders in the Australian dollar and Swiss franc, but one discretionary trader profited from similar price action in the Deutschemark.

German and Japanese bonds rose steadily throughout February, rewarding long positions. In contrast, U.S. Treasuries fell as formerly frightened investors returned capital to equities. Mid-month rumors of hedge-fund selling, along with widespread belief that the Federal Reserve will not soon seek an interest rate cut, drove the 30-year benchmark Treasury’s yield to its lowest level since December.

Industrials Advance

Unrealized profits accrued in industrial metals, particularly nickel and aluminum. Nickel advanced 6.9% by mid-month, recovering from the three-year low it endured in January. In precious metals, a late-month dip and recovery in gold brought minor losses. Futures in the soybean complex fell sharply, lessening overall profit, as the U.S. Department of Agriculture reinforced fears of record South American production.


Energy futures continued their bearish tone, with crude oil hitting levels not seen since 1994. The extended slide of crude oil prices, interrupted by a mid-month price spike, brought meaningful losses. Reduced worldwide petroleum demand is blamed on economic conditions in Asia, and a warmer-than-normal winter due to El Nino. Additionally, with the easing of tensions in the Middle East, the United Nations recommended allowing Iraq to increase oil sales almost threefold.

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FUND 2
March 1998

Soaring stocks and clear trends in currency, particularly in Europe, accounted for a significant overall advance of ____% in March. In a month when the Dow Jones Industrial Average neared yet another historic benchmark (reaching 9,000 in early April), equity markets worldwide were lifted in the updraft.

Stocks in Germany, Spain, and France contributed strongly to profit, reacting in part to expectations of corporate mergers in Europe’s main industries. Also fueling European stocks were a strong U.S. dollar and optimism about a successful European Monetary Union. In London, the FTSE 100 experienced a 225-point swing in one 15-minute period.

“Not Overvalued”

Other stock-friendly factors included stable interest rates and reduced concern about an economic collapse in Asia. Warren Buffet was credited as a factor in the advance, when the famed investor claimed in his annual report to shareholders that the market is not overvalued. Even rising oil prices were cited as a positive, when OPEC announced production cuts, reversing an extended decline.

As European stocks hit new highs, a sinking Deutschemark created profit opportunities for short traders. A top Bundesbank official suggested that Germany consider cutting interest rates, and the mark fell against world currencies, notably the strengthening British pound sterling. The pound hit a new high for 1998 when a top British official warned of the risks of domestic inflation with a common European currency.

Traders also capitalized on the pound’s rise versus the yen, as Japan’s currency sank steadily, ending a recent recovery in an otherwise-steady three-year decline. Short positions in the yen were among the month’s most profitable trades. A bribery scandal at the Bank of Japan eroded confidence in the Japanese economy, and the Nikkei index failed to participate in worldwide advances in equities. Trading the Nikkei 225 index produced minor losses.

Silver Speculators

Losses were taken in metals, with silver the single worst-performing market segment in March. Silver prices dipped and surged throughout the month, with waves of selling by mining companies mixed with buying by speculators amid rumors of tight supply. Copper futures, which have been falling along with the slowdown in Asia’s industrial economy, reversed upward on news of production cuts.

Additional setbacks were sustained in the meats complex, as live hogs and pork bellies sank and then recovered with a U.S. Department of Agriculture report pointing to slowing herd expansion this summer and fall. Unrealized losses affected long positions in coffee, which fell precipitously on word of a large Brazilian crop.

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FUND 3
April 1997

April brought quick reversal of numerous trends in world markets, leading to losses in currencies and interest rates, combined with lesser setbacks in energies and the food complex. Overall, the FUND 3 portfolio endured a drop of 3.96%, tempered by advances in grains and precious metals.

In Europe, early optimism by the fund’s stock-market bulls, sparked by bank mergers, was dashed by news of poor corporate earnings and strength in Euro currencies against the dollar. Markets fluctuated with speculation about interest-rate adjustments, mixed with downward pressure from profit-taking. Hit especially hard in April were stakes in the Italian MIB 30 index, which jumped 4.8% on one day and dropped more than 2% on several others.

Rate Rise Rumors

Timely trading in German DAX futures, in spite of similar choppiness, proved profitable. Germany also allowed gains in the otherwise-adverse interest rate markets, as traders realized profits accrued in earlier months. Bund prices sank in early April. Rumors that German rates would rise were silenced by a late-month decision by the Bundesbank to leave them untouched, at least in the short-term, re-igniting a bond rally. Interest-rate markets elsewhere moved in sync with Germany’s, bringing setbacks in French, Italian, and Japanese bonds.

Yields on Japan’s benchmark 10-year government bond experienced several consecutive all-time lows, punishing short traders, as investors embraced bonds over Japan’s weak currency and equity alternatives. The Japanese bond market was so bullish that it shrugged off unconfirmed talk that six trillion yen would be issued by the government to finance its economic-stimulus package.

The raft of reversals also affected foreign exchange markets, as the yen and the U.S. dollar jockeyed back and forth amid various rumors including word of a broad tax cut. The declining Swiss franc was yet another losing segment of the portfolio, amid increasing confidence of a unified European currency.

Giving Back Gains

Coffee, cattle, and sugar—all profitable in preceding months—returned earlier advances in the tumultuous markets of April. Trend-starved traders found salvation in the grains, however, as corn and wheat fell on expectations of favorable weather. In the soy complex, a downtrend in beans was too random to be exploited, but much of its damage was recouped in the steadier decline of soymeal. Palladium, also profitable to short traders, fell in price when Russia announced a resumption of exports.

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FUND 3
October 1997

Against a backdrop of high volatility in world equity and exchange markets, the FUND 3 fund concluded October with a fractional loss of .06%. Stocks and currencies were, in fact, among the program’s positive performers, while setbacks hit the interest rate, precious metals, and energies sectors.

Stock Gains “Unsustainable”

As investors lost confidence in Asian economies, the Hang Seng index fell 23.3% in a period of three weeks. Stocks suffered worldwide, with the S&P 500 dropping 555 points in a single day, on October 23. The declines followed an earlier wave of October selling, when Federal Reserve Chairman Alan Greenspan described the stock-market boom of recent years as “unsustainable.” The downturn rewarded short positions against the Nasdaq 100, S&P 500, NYSE Composite, and major European exchanges.

Germany’s strong economy moved its central bank to raise short-term interest rates, its first increase in five years. Significant profits were realized in short positions against the German bund, but as rate increases subsequently spread across Europe, the program sustained losses in French, Swiss, and Italian government bonds. Declining Japanese bond futures led to moderate losses as well, in response to a widespread perception of continued weakness in the Japanese economy.

Markets Cheer U.K. Delay

Foreign currencies’ performance against the U.S. dollar was mixed, with the British Pound Sterling and Swiss franc contributing most to that sector’s profitability. The Pound gained as the scales began to tip against the prospect of the U.K. entering Europe’s Economic and Monetary Union before the end of the millennium. Losses were sustained in the dollar’s choppy, sideways movement against the Japanese Yen.

As U.S. bond prices moved upward in a “flight to quality,” U.S. interest rates represented the sector hardest hit by October’s volatility. Losses due to ratcheting markets were mixed among the 30-year and 5-year Treasury notes, and 30-year benchmark bond. Gold displayed none of its traditional appeal as a hedging tool, and losses were sustained throughout the precious metals sector. Unrealized profits accrued from the continued rise in natural gas prices (due to supply concerns), but were offset by losses due to declines in crude oil and natural gas.

Grains gained, in spite of losses in the soy complex. Soybeans hit a seven-month high, but the remainder of October was plagued by choppiness. Corn and wheat prices rose steadily through most of October, on hopes of strong export demand.

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FUND 3
November 1997

November brought relative tranquility to world markets after the squalls of October. An overall decline of 0.59 percent resulted from moderate, mixed setbacks in stocks, commodities, and silver. Nearly offsetting the losses were gains in gold, crude oil, and the yen. Most of the month’s profits were made in steadily declining markets, while losses came from trend reversals.

The fall of the yen, nearly uninterrupted since June, accelerated in November with continued reports of weakness in the Japanese economy. Japan’s stocks, caught in a downward spiral, were also a drag on the yen, which hit a six-month low against the U.S. dollar and five-year lows against European currencies. Shorting the yen against the dollar was the fund’s most profitable trade. Significant gains were also made in the yen’s decline against Deutschemark and pound sterling.

“Loss of Luster”

Trend-following traders capitalized on gold’s continued slide, with futures and spot prices hitting 12-year lows. Analysts attribute the fall to concerns about selling by European central banks, and gold’s “loss of luster” as an inflation hedge. Asia’s market turmoil has also dampened demand for the precious metal, threatening further price erosion. Profits also resulted from falling copper prices, due to increasing inventories and reduced demand in Asia.

Crude oil prices fell sharply, rewarding short positions, when the standoff in Iraq was resolved. Crude prices have dropped almost $4 since their highs in early October. Other components of the energy complex spiked upward, then reversed, but without consequence to fund performance.

Help from Hong Kong

A major reversal hit U.S stocks after early-month selling, leading to losses on both the NYSE Composite and the S&P 500. The S&P rose ___% in November. When stocks rebounded, even the Asian crisis was cited by analysts as a contributor, helping the U.S. markets by slowing down the world economy and reducing inflation potential. Moderate losses resulted from turbulence in the Hang Seng stock index, which rose and fell within a ---% range throughout November.

Setbacks hit futures on coffee, which plunged to their lowest levels since February, as traders focused on the prospect of a large crop from Brazil. Soybeans reversed against a downtrend, causing moderate losses.

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FUND 3
December 1997

December was a steady, profitable period marked by gains in energies, industrial metals, and non-U.S. interest rates. Despite volatility in world equity and currency markets, only one of the month’s 23 trading sessions pulled the portfolio into negative territory. Overall, the FUND 3 fund finished up 2.44%.

Bond prices in Europe climbed in an almost uninterrupted fashion, in a “flight to quality” accompanying turbulent equity markets worldwide. French government bonds alone accounted for 22% of December’s advance, with additional help from debt futures in Italy, Germany, and the U.K. Non-U.S. rates were the portfolio’s single most profitable group, in spite of a costly plunge by Japanese government bonds, which fell on ratings downgrades.

Tax Cuts in Tokyo

Asia’s financial crisis continued to aggravate Japan’s rocky economy. News of a $55 billion rescue of South Korea by the International Monetary Fund caused a one-day jump of 7% in Korean stocks. But in Tokyo, the Nikkei dipped and recovered throughout the month, plagued by fear of corporate failures, and later bolstered by an economic stimulus package complete with income tax rebates. On Dec. 29, the Nikkei index closed at its lowest level of the year, yet Japanese stocks produced a small profit in December.

As the Asian contagion spread, losses were sustained in U.S. and European stocks. After reaching an all-time high in early December, the S&P 500 dropped more than 6% in the next two weeks. A similar reversal of fortune hit the German DAX, which became December’s second-largest losing segment.

Exporters Ailing

Overseas currencies fell, as the U.S. dollar gained favor as a safe haven from political and economic instability elsewhere. Losses were sustained in long trades both in the British pound and Swiss franc. Canada’s dollar fell to an 11-year low against the U.S. currency, hurting Canadian exporters but rewarding the portfolio’s short traders.

Short positions in many commodities benefited as well. Crude oil and natural gas continued a steady slide that began in late October. Saudi Arabian producers unveiled plans to raise output, followed by a similar announcement by Iraq. Copper closed under 80 cents per pound for the first time since January 1994, due to sagging demand in Asia. Grain prices declined after a Japanese food company filed for protection from creditors, and falling soybeans markets produced profits.

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FUND 3
January 1998

January brought sharp reversals to some of the preceding months’ most enduring trends, particularly in foreign exchange and precious metals. Damage from Asia’s economic crisis subsided in some respects, but also spread to new markets previously unaffected. Overall, the FUND 3 portfolio endured a setback of 1.68%.

Many traders who have profited from the Japanese yen’s six-month slide suffered as the yen finally reversed upward. The strengthening yen is attributed in part to renewed confidence in the Japanese economy, following last month’s announcement of an economic stimulus package. Faith in Japan was bolstered again in January, with the resignation of key economic officials. Also boosting confidence in Asian countries were signs of their increasing interest in the International Monetary Fund’s rescue plan.

Contagion Hits Canada

Asia’s storm clouds, however, continued to drift across the globe. The Canadian dollar tumbled against world currencies, accounting for 69% of the portfolio’s net setback in January. Canada has been under pressure due to weakness in commodity prices and concern over Canadian exporters’ exposure to Asia. Also hurt have been Australian exporters and currency, but with less direct consequence for the fund.

Stocks surged, then dropped sharply in coincidence with the White House sexual-impropriety scandal. The DJIA concluded January a single point below its opening level, sparking speculation about the mythical “January effect.” An upward move in January, it goes, foretells a bull market for the year. For January futures traders, the whipsawing U.S. stock market brought mainly losses. A dramatic early-month decline in Asian stocks, exemplified by the Nikkei, was followed by a recovery to well above New Years levels.

Return to Risk?

Bright spots appeared in the interest rate markets, both in the U.S. and abroad. Profits resulted from a decline in U.S. treasuries, with the continued absence of inflation signs, and from a declining Eurodollar. Declining bond prices resulted from less “flight to quality” migration by investors, perhaps due to lessening fears about Asia. The same factors produced profits in German and French bonds.

Profits in commodities, particularly palm oil and orange juice, were offset by losses in precious metals. Silver reversed downward after a two-month climb, causing losses, then resumed its ascent. Silver has perplexed traders with an extended divergence from the downward movement of gold. Silver’s rise was attributed to increasing industrial demand, and later, to a buying spree by investor Warren Buffett.

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FUND 3
February 1998

As world stock and bond markets recovered and stabilized in February, currencies and commodities took center stage, mixing meaningful gains among losses in the FUND 3 Fund. Overall, the portfolio sustained a marginal setback of .81%.

The month opened with a one-day 14.3% gain in the Hang Seng Index, followed by several large advances and declines. While the choppy Hong Kong stock market brought losses to the portfolio, stock-index trading in general accounted for a significant net profit. The S&P 500 rose 7% during February, setting 13 record highs, as fears about Asia’s economic woes subsided.

Iraq Tensions Ease

European currencies brought difficult trading conditions and reversal losses, as the Deutschemark spiked early against world currencies, plummeted, then spiked again. The Swiss Franc market exhibited a similarly choppy pattern, attributed in part to the unwinding of long safe-haven positions with the easing of tensions in Iraq. Setbacks also hit long positions in the Japanese yen, which seesawed amid rumors of more economic-stimulus action by Japan’s government.

As traders were chopped up in European currencies, additional losses were sustained in U.S. interest rates, particularly Eurodollars. U.S. rates in general sank steadily as formerly frightened investors returned capital to equities. Mid-month rumors of hedge-fund selling, along with widespread belief that the Federal Reserve will not soon seek an interest rate cut, drove the 30-year benchmark Treasury’s yield to its lowest level since December.

Where’s the Beef?

A broad mix of commodities brought February’s gains. In the meats complex, short positions in live cattle and lean hogs contributed equally, in spite of dissimilar price charts. Cattle reversed upward in mid-month, helped by what some analysts called a “phenomenal” demand for beef. Hog futures plunged without interruption, on news of oversupply and weakening demand.

Crude and heating oil, another profitable sector, hit four-year lows because of several factors. Reduced worldwide petroleum demand was blamed on economic conditions in Asia. A warmer-than-normal winter has been attributed to El Nino. With the easing of tensions in the Middle East, the United Nations recommended allowing Iraq to increase oil sales almost threefold.

Soybeans, soybean oil, and soybean meal fell sharply, rewarding short traders, as the U.S. Department of Agriculture reinforced fears of record South American production. Losses hit the volatile coffee, orange juice, and palm oil markets on concerns about excess supply.

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FUND 3
March 1998

Soaring stocks and rebounding energy prices brought a March gain of 1.13% to the fund. In a month when the Dow Jones Industrial Average neared yet another historic benchmark (reaching 9,000 in early April), equity markets worldwide were lifted in the updraft.

Stocks in Germany, Spain, Italy, and France contributed equally to profit, reacting in part to expectations of corporate mergers in Europe’s main industries. Also fueling European stocks were a strong U.S. dollar and optimism about a successful European Monetary Union. In London, the FTSE 100 experienced a 225-point swing in one 15-minute period.

Russia Rattles Europe

European markets were rattled briefly when Russian president Boris Yeltsin announced the dismissal of his entire cabinet, in an effort to step up Russia’s drive for reform. But recovery followed quickly, partly in response to good news in world energy markets.

First, crude prices hit lows not seen in nearly a decade, and modest energy costs were cited among positives driving stocks upward. Then came OPEC’s announcement of production cutbacks, sending crude prices from less than $14 per barrel to more than $17 in just a few days. The recovery itself was taken by many as a sign of support for certain Euro stocks.

The whipsawing energy markets brought direct setbacks to the fund, however. with stop-loss selling in crude and heating oil. Other costly declines hit the soy complex, which tumbled on expectations of a record U.S. crop, and cotton, which fell on higher-than-expected planting estimates by the Department of Agriculture.

Coffee and Corn

Short positions in coffee represented the month’s single most profitable market segment, as prices fell precipitously on word of an expected large Brazilian crop. Short-trading corn futures brought gains as well, as grain markets drifted lower due to weak export demand. An up-and-down wheat market caused minor losses.

Japan’s faltering economy, offset against Europe’s strength, brought minor gains to Deutschemark/Yen cross traders. The yen sank steadily in March, ending its recent a short-term recovery in an otherwise steady three-year decline. A bribery scandal at the Bank of Japan further eroded confidence in the Japanese economy. The Nikkei index failed to participate in worldwide advances in equities, and trading on the Nikkei 225 index proved costly.

As equities attracted the world’s investment dollars, choppy markets in non-U.S. interest rates brought setbacks to the fund, particularly in the German bund and Euro Swiss franc. European debt spreads drifted lower with declining bond rates.

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FUNDS 4-12
QUARTERLY REPORTS

FUND 4

A difficult quarter for trend follower FUND 4 stemmed from the reversal of extended declines in the energy markets, occurring in late March. Unrealized profits evaporated, replaced by losses, when crude oil jumped approximately 25% in a single week, following OPEC’s announcement of production cuts. Significant setbacks in crude were accompanied by losses in heating oil and natural gas, and offset only in small part by better results in unleaded gasoline.

Relief from other sectors was marginal as well, with precious metals doing the most to mitigate damage by the energies. Silver’s steady climb, due in part to buying by Warren Buffett, produced profits while a choppy gold market yielded minor losses. The decline of the Japanese yen brought small gains, but frustrated AIS traders missed out entirely on profit potential from the quarter’s soaring stock market.

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FUND 5

FUND 5 controlling the smallest portion of the portfolio, turned the quarter’s flattest performance, straying less than 1% from its opening level each month. Unrealized profits accrued in a balanced mix of currencies, grains, metals, and U.S. interest rates, while losses were taken in many of the same sectors, and in non-U.S. interest rates. Denali’s discretionary traders, regrettably, bet against equities and opted out of the quarter’s bullish stock market run.


FUND 5

A positive quarter for FUND 5 resulted from timely trading in stocks and currencies. It began and ended the quarter with virtually no open interest in stocks, but during the period realized significant profits on futures on the NASDAQ, NYSE, and S&P 500. Gains came from shorting the indexes following their rapid rise in April. Its short traders were also helped by the steady fall of the Japanese yen, until government intervention incited a reversal in mid-June. April was a losing month for FUND 5, which was caught on the wrong side of declining markets for grains and meats. Rising interest rates boosted profits in May and June.

FUND 5

Three consecutive profitable months resulted in an advance for the quarter of approximately 11%, as FUND 5 capitalized on strong upward movement in interest rate futures. After beginning the quarter with only minor stakes in rates, FUND 5 staged timely entry and exit decisions in the markets for various U.S. treasury notes as well as the 30-year benchmark bond and the Eurodollar. Most positions were closed before October.

The second most profitable sector was foreign exchange, with FUND 5 again concluding the quarter with little open interest. Most profitable were long positions in the rising British pound versus the Deutschemark and Japanese yen, which began to decline in mid-August.

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FUND 6

January’s advance of nearly 6% was erased in the two months that followed, with late March bringing most of the pain; FUND 6 was caught on the wrong side of currency markets. One of few traders of late to do well in Asian markets, Dominion profited from long positions in the recovering Hang Seng index. European and U.S. stocks also provided a boost, but some of the equity gains were given back to Japan’s faltering Nikkei index.

FUND 6 cashed out a long-held profitable stake in U.S. Treasury bonds, while short positions in the Deutschemark and Swiss franc produced significant paper profits yet unrealized.


FUND 6

Exposure to relatively few markets, compared to other traders, was a winning formula for FUND 6, which controls approximately 15% of the portfolio. Stocks, interest rates, and currencies accounted for virtually all second-quarter movement in this highly focused fund, with gains in the first two sectors and losses in the last.

By July, FUND 6 became even more focused, holding only a handful of open positions, in European and Asian stock indexes. FUND 6 was up, down, and back up in April, May, and June, respectively, for a net advance of _____%. Gains were greatest in long positions in the Deutschemark, U.S. 30-year T-Bond, and S&P 500, with continued strength in the U.S. and German economies.


FUND 6

While not a stellar period for stocks, the third quarter was mildly positive for FUND 6, with an overall gain of less than 2%. Most of the advance was realized on futures on equity indexes. From their July high, U.S. stocks plunged approximately 20 percent before September. FUND 6 profited through short positions on the S&P 500, offsetting losses on Asian equities including the Hang Seng and the Nikkei. Climbing interest rates were also profitable for Dominion, while the volatile foreign exchange markets accounted for the quarter’s greatest losses. Of all seven traders mingled in the Bank of Montreal portfolio, Dominion controls nearly the largest portion, approximately 17%.

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FUND 7

Portfolio newcomer FUND 7 enjoyed a strongly positive quarter, thanks to gains in interest rates, metals, and agricultural commodities. Coffee was its single most profitable trade, rising on fears of drought, then falling on oversupply concerns. Early losses in aluminum and nickel were erased when markets reversed upward, but similar price action in copper was costly to trend followers at FUND 7. Tumbling energy prices were a drag on profits in June, a month in which this non-discretionary trader nonetheless saw an advance in excess of 5%. FUND 7 controls about slightly more 10% of the portfolio, which represents approximately the smallest stake among all traders.

FUND 7

A quarterly advance of more than 20% was the reward for FUND 7 Capital’s accurate anticipation of trends in interest rates, as investors fled the roiling stock and currency markets, to the perceived safety of bonds. Stocks and currencies contributed significantly to Fort Orange’s profit, however, with disproportionately high activity in European markets. FUND 7 is a very broad-based trend-following CTA, with activity in more markets than perhaps any other Bank of Montreal trader. Losses were scattered among commodities, as trend reversals hit crude oil, aluminum, and copper.

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FUND 8

A difficult period for FUND 8, trading about 17% of the portfolio’s capital, stemmed from exposure to many of the quarter’s most volatile markets. In April, FUND 8 recorded greatest gains in the U.S. 30-year Treasury Bond, ironically while suffering greatest losses in the 10-year U.S. treasuries. A steep mid-month decline was attributed to increasing fear of an interest-rate boost by the Federal Reserve.

In May, crude and heating oil ranked first and second on FUND 8’s list of losing trades, with 10-year and 30-year U.S. treasuries placing third and fourth. Oil prices hit 12-year lows during the quarter, but rumors about OPEC supply cuts made the markets spike upward repeatedly. June brought small salvation, with the lessening of losses accrued earlier in industrial metals and the food complex. On the plus side, FUND 8 profited on the entrenched downtrend in the Japanese yen, which continued from April to mid-June.

FUND 8

While interest rate markets were clearly the place to be in 1998’s third quarter, FUND 8’s exposure to that winning sector was limited to domestic U.S. rates. That degree of exposure was sufficient, however, to score a gain in excess of 8% for the quarter, with profits in bonds, notes, and the Eurodollar. Hill exited the quarter with nearly the same portfolio of debt-futures positions it brought in, but with more than $100,000 in new, unrealized profits. FUND 8 profited also from strength in European currencies, after buying both against the U.S. dollar, and from short positions against the sinking Japanese yen.


FUND 8

Although January brought only a fractional gain, FUND 8 was the program’s only trader to string together three positive months for the quarter. FUND 8 scattered modest gains in multiple markets, with best results in the energies sector, in which crude oil futures hit a 10-year low. Stocks, precious metals, and European currencies scored gains, while losses were greatest in U.S. interest rates. FUND 8’s allocation of the portfolio was raised from 16.1% in January to 17.4% in March. FUND 8 applies non-discretionary quantitative analysis to the investment process.

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FUND 9

A gain of nearly 10% before mid-January was mostly erased before the month ended, as FUND 9’s short-term traders capitalized on early moves in grains and non-U.S. interest rates. As the investment climate changed in February, favoring stocks, FUND 9 fared worst of all traders, surrendering previous profits in currencies and energies, and sustaining substantial losses in a broad portfolio of European, Asian, and U.S. stocks.

FUND 9’s discretionary trading program lost 5.53% of net asset value in February, and was subsequently dropped from the portfolio. Cash was reallocated to the six remaining traders in March, with 3.2% unallocated.

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FUND 10

Trading successfully in the bullish stock market, and in spite of losses elsewhere, FUND 10 managed a solid gain for the quarter. French, German, and British stocks, following the upward lead of Wall Street, accounted for most of the gains, while interest rates in Italy and Spain added significantly as well. Falling copper prices, attributed to lower demand in Asia, forced the surrender of previous profits, and FUND 10 was hit hard by the fall of crude and heating oil prices. Setbacks affected grains, meats, and precious metals. FUND 10 controls more than 20% of the portfolio.

FUND 10

The use of leverage once again proved itself a perilous play, as FUND 10 concluded the quarter with its largest decline since being added to the portfolio, a 17.37% drawdown. The quarter started strongly, with early gains adding to profits in the soaring stock market. But reversals hit stocks just as volatility was aggravating losses in energies and agricultural commodities. Non-U.S. interest rates wreaked more trouble, in spite of solid gains in German bonds. Setbacks were greatest in the Australian, British, and Spanish debt markets. Even U.S. rates brought losses, in spite of their steady ascent in June, with FUND 10 missing the move. Industrial metals were the quarter’s only advancing sector, with rising aluminum futures credited with most of the gain.

FUND 10

Following a trying setback in the year’s second quarter, FUND 10 enjoyed a healthy rebound with profits of more than 20%. More remarkable is that the gain occurred almost entirely in one month, August, in which most traders in the industry posted single-digit returns. Nearly all of the quarter’s aggregate profit came in interest rates, with the rising German bund fueling more than half of the advance. FUND 10 also traded profitably in grains, energies, and meats, but the gains were dwarfed by those in the month’s center-stage market, interest rates. FUND 10 controls approximately 17% of the Bank of Montreal portfolio, the largest share, but equal to that of two other traders.

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FUND 11

Portfolio newcomer FUND 11, controlling 11% of the portfolio, traded only in the grain markets, only in September. A flat, zero-net month resulted from realized gains in the corn and soy complex, but unrealized losses mostly in the same markets. Grain futures prices themselves were remarkably stable and flat throughout September, following extended declines.

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FUND 12

FUND 12 saw profits in agricultural commodities as well, but like most other third-quarter traders, made most of its hay in interest rates. FUND 12 came into the quarter long 64 various contracts on the soon-to-soar non-U.S. rates, and exited the period long 147 such contracts--plus more than $200,000 in new, unrealized gains, accumulated along the way. Realized gains from non-U.S. rates, meanwhile, topped $147,000; U.S. rates, realized and unrealized combined, added another $87,000. Not without difficulty, the quarter brought setbacks in stocks, mostly in U.S. markets, which tumbled by 20 percent in barely two months’ time.

FUND 12

Stocks were again the story in very solid quarter by FUND 12, in which February and March each saw gains exceeding 5%. Trading a diverse mix of U.S and European equity indices, as well as puts and calls on the S&P 500, FUND 12 produced significant profits realized and unrealized. Losses were sustained in the trading of European currencies, especially the falling Deutschemark and the choppy Japanese yen. The declining energies were costly to the trend-following traders at FUND 12, and additional setbacks were sustained in U.S. interest rates, offset partly by scattered gains in Italian and German bonds.

FUND 12

For FUND 12, a positive May was sandwiched between two losing months, for an overall decline of about 2.5%. In a pattern familiar throughout the portfolio, FUND 12 mixed gains in stocks and metals with losses in currencies, energies, and interest rates. Unlike others, FUND 12 capitalized on price movement not just in industrial metals, but also precious metals. Palladium brought significant profits to FUND 12 traders, as a disruption in supply from Russia pushed prices to a record high. Among the industrials, aluminum, copper, nickel, and zinc all added to profit. In foreign exchange, accumulated gains were surrendered in numerous markets, especially in long positions in the yen and Deutschemark, following June’s turbulence. Late-quarter world events also adversely affected FUND 12 stake in the interest rate markets of Australia and Europe.

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