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June 25, 2007

CTA Confidential: Ace Capital Management
by MA-Research.com

Originally published by Managed Account Research, Inc. on June 15, 2007

CTA Confidential^SM
"An ongoing series of qualitative investigations
into managed futures trading programs"

CASE NO. 0370760
Ace Capital Management, LLC
Robert Weinreb, Principal
Mini-Stock Index Futures Program

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. INVESTING IN FUTURES AND OPTIONS INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL INVESTORS. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THEREFORE, INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS AND DETERMINE WHETHER THEY ARE SUITABLE FOR INVESTING IN LIGHT OF THEIR FINANCIAL CONDITION AND INVESTMENT OBJECTIVES.

Robert Weinreb is the sole principal for Ace Capital Management, LLC, a commodity trading advisor (CTA) registered since May 2006. He is responsible for all trading decisions as well as the operations of the firm. Mr. Weinreb received a B.S. in Accounting from Brooklyn College in 1969 and after becoming a CPA in 1974 developed a public accounting practice in the New York metropolitan area. He has since been phasing out this practice and now mainly focuses his attention on futures trading. Managed Account Research recently conducted a phone interview with Mr. Weinreb to discuss Ace Capital's performance to date, as well as his background and approach to trading. The exposé below summarizes what we learned.

Experience counts! The fact that someone has a long history trading futures, even if it did not involve trading client accounts, tends to carry a lot of weight with investors who step up early with allocations to emerging CTAs. So it says a lot to learn that when it comes to trading futures Robert Weinreb has around twenty-five years worth of experience managing his own account.

And this is not Weinreb's first foray into managed futures as a professional. Between 1986 and 1993 Weinreb was registered as a CTA and published a weekly newsletter called Scorpio Futures which provided trading signals on the markets. His interest in this activity, however, faded over time and he stopped publishing the newsletter after one year.

Weinreb's first involvement with managed futures started when he invested in a CTA program[1] in the early 1980s that sounded interesting based on a write-up he came across. To gain some perspective on how early this was within the emergence of the industry, Managed Account Reports estimated at the time that only $300 million was spread among a few dozen firms in 1980 compared to approximately $132 billion invested in CTAs as documented by The Barclay Group during the 4th quarter of 2004.

In any case, according to Weinreb this CTA's trading strategy "worked well" but eventually he decided to try futures trading on his own. That initiated a process of extensive research and testing of trading strategies in a whole variety of liquid commodity contracts. "Some [contracts] worked better than others and over the years I encountered many situations, each one teaching me something."

That goes to the heart of Weinreb's investment philosophy -- nothing takes the place of actual trading experience and what one learns from it. "Making mistakes is part of the cost of trading and sometimes such mistakes will cost dearly. The key is to learn from those mistakes and that is the tuition one pays for becoming a better trader in the future."

The above core belief dovetails into another key aspect of Weinreb's trading -- learning to trade one instrument very well. "Concentration in one area of trading leads to a specialization in that area. Rather than look for where the next good market to trade will come from, knowing one market in and out can give you greater confidence that your trades will be more successful."

Based on personal experience Weinreb also thinks that "for outsiders there is a lot of risk trading commodities; you have to understand the fundamentals of that particular commodity business or sooner or later you run into trouble." On the other hand, "anyone can research and learn the stock market." This is why Ace Capital's program only focuses on the mini-stock indices contract.[2]

"The stock market has been traded for well over a hundred years, but nothing really changes in the long run. The personality of the stock market is the combination of the personality of the millions of people who trade it. Personalities don't change over the years and the strategy to deal with the market remains the same and will always remain the same, though the prices will be continually changing. You must adapt as the market changes, but these situations have occurred before at some time over the years."

Ace Capital's trading program is roughly 20% discretionary and 80% systematic using a combination of different underlying systems that provide signals including price objectives. According to Weinreb his approach usually works best in sideways markets/congestion zones and up ward trending markets. And although not the best of environments for his strategy, Weinreb stated to us that the trading can be adapted to downward moving markets as well. At times he may make a determination that it is more prudent to stay out of the market entirely.

A variety of non-proprietary technical and sentiment indicators are analyzed to project where the market may be headed, with both short-term and intermediate term trends taken into account. To a much lesser degree, Weinreb is influenced by fundamentals or seasonality such as the presidential cycle.

"I focus on where the market is heading. When trading the stock market, too many people are overly concerned with where the market is heading today, and disregarding where the market is heading overall. Some traders fail to look at the big picture. You may not make money today on a trade that you placed but still come out with a profit in the following day. Many traders get out of a trade too quickly with a loss, even though the trade they placed was a correct one."

In practice Ace Capital's trading program trades in the direction of the intermediate term and only occasionally will trade counter-trend. The majority of trades last a couple of days, but some open position may remain on the books for as long as two to four weeks. "I don't jump from short to long very often and switching directional focus would not happen unless there is an extreme situation; for example, two weeks before February 27th I focused on the short side because of statistics."

This brings up the question: when and upon what factors would Ace Capital make a determination that a bearish trend is in place? Weinreb's answer wasn't clear cut and he provided a high-level response saying that a "combination of indicators would upon evaluation dictate if we were in a bear market."

However, in discussing specifics about risk management, his answers did shed additional light. Weinreb feels that each situation is unique and should be evaluated as trades unfold for losing positions. Generally, he manages risk by scaling in and out of positions ranging from 2-6 contracts for each $100,000 unit size. Stops are usually not placed on individual contracts immediately at the time that a position is filled, rather stops may be placed on the entire set of open positions as market conditions warrant.

Further, risk is not evaluated on a per trade basis but on the combined percent of equity at risk of all open positions. Weinreb estimates that his program may experience a potential drawdown of 15%, but Managed Account Research reminds investors that there is a substantial risk of loss in futures trading and a decline of greater magnitude is therefore possible with respect to any trading program.

Weinreb started trading his current strategy on proprietary capital in September 2005 and Ace Capital began trading client accounts in October 2006. Last year for client accounts, Ace Capital generated 9.7% on only three months of trading and is up a little over 16% year-to-date as the end of May 2007.

Over the last few years investors have experienced a low volatile stock market with some minor corrections of note. Taking Weinreb's proprietary performance into consideration, the only drawdown he has experienced so far was in May 2006 when he was down 5.42% in his own account. February and March 2007, another volatile period resulted in a positive 0.71% and 2.01% return, respectively.

That said we are watching carefully to see how his trading this month (June 2007) evolves in light of volatile conditions as a result of higher rates across the yield curve.

Ace Capital's program is electronically traded and runs a velocity of approximately 2,000 to 3,000 round turns per million per year. Although discretion plays a role in Weinreb's trading, he doesn't sit in front of the screen. Rather, during the course of the day he will check the market, enter trades when appropriate and check back later to see if filled. Execution is facilitated through Man Financial but Ace Capital will give-up trades to different clearing firms (see disclosure document for further discussion). Average margin to equity tends to range from 10% to 15% and Ace Capital will accept notional funding.

On a personal note, Weinreb lives on Long Island and has been married 37 years. He has two sons, one a doctor and one a lawyer. Once he was a photography buff, enjoying it as a hobby, but nowadays his main focus is the markets. Which returns us to our original thesis: experience counts...

A singular market focus combined with years of experience in a variety of market conditions makes Ace Capital's trading a managed futures program to watch.

[1] Tasas Capital Management, Inc., a commodity trading advisor registered from July 1984 to June 1987 and July 1997 to September 2000; listed principal was Craig Pardey (NFA ID 0100281)
[2] Initially Mr. Weinreb's trading for Ace Capital focused on the mini-Dow futures, however since accumulating additional assets under management, trading is now focused on the mini-S&P because it is a more liquid contract.

Michael "Mack" Frankfurter
Chief Investment Strategist
Managed Account Research, Inc.

This article was written by Michael "Mack" Frankfurter, Chief Investment Strategist and an Associated Person of Managed Account Research, Inc. The analysis and opinions expressed in this commentary have been reviewed and is approved by a principal of Managed Account Research, Inc. as of the date of this issue. Every effort has been made to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. There is no guarantee that the forecasts made, if any, will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. This material does not constitute a solicitation to invest in any program offered by Managed Account Research, Inc. including any CTA trading program described in the above article which may only be made upon receipt of its disclosure document. Past performance is not necessarily indicative of future results. Investment involves risk. Investing in foreign markets involves currency and political risks. The risk of loss in trading commodities can be substantial.

For more information about managed futures, visit www.ma-research.com. You may also call (800) 308-1495 to speak to an Associated Person, or contact us via email at info@ma-research.com. A disclosure document for the above described trading program will be provided upon request at no additional cost. The mark: "CTA Confidential" is a servicemark of Managed Account Research, Inc.

The regulations of the Commodity Futures Trading Commission ("CFTC") require that prospective customers of a commodity trading advisor ("CTA") receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the clients commodity interest trading and that certain risk factors be highlighted. In some cases, managed commodity accounts are subject to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA. You may sustain a total loss of the initial margin funds and additional funds that you deposit with your brokers to establish or maintain a position in the commodity futures market. This and other risk statements contained herein cannot disclose all of the risks and other significant aspects of the commodity markets. Therefore, you should proceed directly to the disclosure document and study it carefully to determine whether such trading is appropriate for you in light of your financial condition. The CFTC has not passed upon the merits of participating in any of these trading programs nor on the adequacy or accuracy of any of these disclosure documents. Other disclosure statements are required to be provided you before a commodity account may be opened for you.

About the author: Michael "Mack" Frankfurter is the Chief Investment Strategist and an Associated Person of Managed Account Research, Inc., an independent Introducing Broker focused on advising its clients in managed futures investments. Mr. Frankfurter is also a co-founder and Managing Director of Operations for Cervino Capital Management LLC, a commodity trading advisor and registered investment adviser based in Los Angeles, California. Occasionally, he pens articles as a freelance financial writer.