Types of Clients
Interests in the Funds, which are a collective investment vehicle sponsored by PCM, are
not registered under the Securities Act of 1933, as amended (the “Securities Act”), and
the Funds are not registered under the Investment Company Act of 1940, as amended
(the “Investment Company Act”). Accordingly, interests in the Funds are offered and sold
exclusively to investors satisfying the applicable eligibility and suitability requirements in
private transactions within the United States. Typically, these investors are high net worth
individuals, institutions and other entities. Details concerning applicable suitability criteria
are set forth in the respective Funds' offering and/or governing documents.
The minimum initial investment requirement in the Funds is $250,000 U.S. The minimum
investment to open a separately managed account is $10,000,000. PCM may raise or
lower these minimums from time to time and accept initial capital contributions below the
established minimums at its discretion.
Methods of Analysis, Investment Strategies and Risk of Loss
The Funds’ objective is to realize consistently positive absolute returns with low variance,
through a diversified portfolio of options on ETFs. The Funds may also engage in
selective hedging techniques to control downside risk in the equity investments while
simultaneously holding to a diversified portfolio of option positions.
The Manager employs both quantitative and qualitative investment approaches to pursue
the Funds’ objective by utilizing a broad array of option strategies on ETFs (exchange
traded funds) to establish both long and short exposures to different sectors, market
capitalizations, interest rates, commodities, currencies and geographies.
Why do we use options? First, options allow us to make money during circumstances in
which our underlying exposure selections are not necessarily correct – an attribute highly
significant in generating absolute returns over the long-run. Second, options allow us to
take advantage of volatility, potentially dampening overall portfolio volatility and allowing
us to avoid much of the cyclicality of other strategies. Third, options are what we know;
much of the portfolio is dynamic and our success is very much rooted in our 25 years of
option trading, risk management focus, and portfolio management experience.
The Manager’s multi-disciplined investment process consists of three steps:
1. First, we select ETFs expected to provide a diversified overall portfolio exposure
based on our macro view of the markets – both long and short. The portfolio construction
process includes the utilization of quantitative methods such as covariance matrices and
portfolio optimization techniques. These methods are employed to support portfolio
allocations with an emphasis on the ETFs that the Manager believes have the most
attractive risk-adjusted returns. The Manager seeks to employ this strategic objective
with a focus on long-term ETF movements and valuations while simultaneously
remaining cognizant of investment opportunities presented by short-term fluctuations.
2. Second, the Manager implements a proprietary matrix of implied versus historical
levels of volatility. This matrix helps provide the Manager with the specific selection of
unique strike prices and expiration months necessary to construct the portfolio of options
required to capture its predetermined underlying ETF exposures. This is our volatility
arbitrage background at work, and although we do not run a volatility arbitrage book per
se, the ultimate selection of option positions is grounded in this analysis. Our option
portfolio construction processes are designed to further insulate the underlying ETF
exposures from less predictable macroeconomic factors such as market direction and
interest rates.
3. Finally, the Manager actively rebalances the Funds option positions as underlying
portfolio exposures change and/or implied volatility movements create opportunities to
improve the reward/risk attributes of the entire portfolio. The Manager may also purchase
put options to mitigate the downside market risk of the entire portfolios of the Funds.
The Manager’s trading strategies and models may be revised from time to time as a
result of ongoing research and development that seeks to devise new strategies and
systems, as well as to improve current methods. The strategies and systems used by the
Manager in the future may differ from those presently used, due to changes resulting
from this research. Investors generally will not be informed of these changes as they
occur.
Risk Factors
The Funds’ investment strategies are speculative and entail substantial risk of loss.
There can be no assurance that the investment objectives of the Funds will be achieved.
Accordingly, the Funds’ strategies could result in substantial losses under certain
circumstances.
In considering an investment in the Funds, prospective investors should be aware of
certain special considerations and risk factors, which include, but are not limited to, the
following:
• General Investment Risk;
• Strategy Risk, i.e., the risk that the Funds’ investment strategies and/or investment
techniques may not work as intended
Certain special considerations and risk factors that fall under these general categories
are described below. Others are referred to elsewhere in the Private Placement
Memorandums and will not be repeated here. Prospective investors should therefore
read the entire Memorandums before subscribing for Interests. In addition, the inclusion
of specific special considerations and risk factors both here and in the Memorandums
should not be construed to imply they are described in complete detail, or that there are
not other special considerations or risk factors that apply to an investment in the Funds.
General Investment Risk
All investments in securities and other financial instruments involves substantial risk of
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