February 2011 Month-End Trading Report

Dear Investor,

We hope that this message finds you all well as we enter into our last month of the first quarter in 2011. February was certainly not dull, and had some surprises for us on a few different fronts. We had both good and bad news this month, but overall given many of the events which unfolded we cannot complain too much with how things unfolded. The good news is its looking like Chrome FX is getting back on track. The bad news is our new system Vega FX encountered its first negative month for us. The shocking news was some of the discrepancies between our brokers and PFX. More details on all of these points will be explained below. March appears to be off to a better start for Vega, but a tough start for PFX and CFX. We have 16 trading days left in the month, so we will see how things fair out for March and we are aiming for a positive month across the board.

As always, we encourage both our current and prospective clients to read through our update in its entirety so that everyone is up-to-date on our latest developments.  As always we report the good, bad, and the ugly, we don’t hold back on anything, and we pride ourselves in explaining things as openly and honestly and clearly as we can to our clients. We are trying to keep our updates as short and to the point as possible going forward.

Our returns for the month of February at both of our brokers are as follows…

SYSTEM	BROKER 1 (SPAREN FX)	BROKER 2 (INOVATRADE)
Precision FX	-0.98%	13.28%
Chrome FX	9.33%	8.79%
McLaren FX	0.97%	0.54%
Vega FX	n/a	-9.92%
February Average	3.11%	3.17%

* Account Discrepancies – Once again, please remember that if your returns for a given month do not match our posted returns take note that our numbers are from the 1st of each calendar month, to the last trading day of the calendar month. If you have invested in the middle of the month, your numbers may not match ours and could vary significantly. In addition to this, if we have open trades at month-end, we calculate our return on the current balance that day at midnight server time, NOT the floating equity. So open trades which have not realized their PnLs yet will be carried into the next month.

* Please keep in mind that we are now trading some of our systems at two different brokers. We will always have discrepancies between different brokers no matter who they are. For certain systems we have also noticed small discrepancies between larger investor’s accounts (100K+) and smaller investor’s accounts (<5K). This often has to do with the broker’s min position sizes and how smaller trades are distributed with the allocation software in our MAM/PAMM. Please take note that while our returns are calculated from 1^st of each calendar month to the last trading day of the month, at Inovatrade brokerage our commission period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.

Our complete Performance Tables have also been updated with the following statistics of interest (now broken down by both brokerages):

BROKERAGE 1 (Sparen)
MONTH		PRECISION		CHROME		MCLAREN		AVERAGE
Dec-08		32.30%		72.73%				52.52%
Jan-09		18.70%		-4.19%				7.26%
Feb-09		27.50%		160.30%				93.90%
Mar-09		29.50%		21.97%				25.74%
Apr-09		-34.40%		61.33%				13.47%
May-09		53.30%		33.35%		9.43%		32.03%
Jun-09		23.60%		25.77%		30.46%		26.61%
Jul-09		10.10%		20.69%		28.02%		19.60%
Aug-09		26.92%		10.77%		26.94%		21.54%
Sep-09		-0.32%		5.44%		7.83%		4.32%
Oct-09		-4.26%		20.36%		11.94%		9.35%
Nov-09		10.76%		-20.98%		29.39%		6.39%
Dec-09		9.37%		15.94%		7.78%		11.03%
Jan-10		33.63%		27.91%		4.30%		21.95%
Feb-10		15.31%		14.93%		2.33%		10.86%
Mar-10		15.43%		-5.08%		6.75%		5.70%
Apr-10		-8.11%		-9.43%		2.99%		-4.85%
May-10		0.70%		-7.66%		21.07%		4.70%
Jun-10		20.86%		0.00%		9.68%		10.18%
Jul-10		10.80%		14.57%		0.15%		8.51%
Aug-10		5.46%		2.34%		7.35%		5.05%
Sep-10		14.91%		6.13%		1.37%		7.47%
Oct-10		10.36%		0.02%		28.55%		12.98%
Nov-10		0.05%		5.60%		-0.35%		1.77%
Dec-10		8.83%		-8.04%		0.20%		0.33%
Jan-11		5.93%		-5.24%		-0.17%		0.17%
Feb-11		-0.98%		9.33%		0.97%		3.11%
TOTAL COMP'D RETURN:		1646.93%		3461.16%		758.03%
MONTHLY AVERAGE:		12.44%		17.74%		10.77%		15.25%
BROKERAGE 2 (Inova)
MONTH	PRECISION		CHROME		MCLAREN		VEGA		AVERAGE
Nov-09							35.58%		35.58%
Dec-09							11.14%		11.14%
Jan-10							14.63%		14.63%
Feb-10							22.48%		22.48%
Mar-10							13.57%		13.57%
Apr-10							1.34%		1.34%
May-10							6.52%		6.52%
Jun-10							12.75%		12.75%
Jul-10							4.29%		4.29%
Aug-10							3.34%		3.34%
Sep-10							0.82%		0.82%
Oct-10							9.60%		9.60%
Nov-10							19.62%		19.62%
Dec-10							5.77%		5.77%
Jan-11	-3.16%		-3.89%		0.15%		12.39%		1.37%
Feb-11	13.28%		8.79%		0.54%		-9.92%		3.17%
TOTAL COMP'D RETURN:	9.70%		4.56%		0.69%		346.08%
MONTHLY AVERAGE:	5.06%		2.45%		0.35%		10.25%		10.37%

MONTH-END TRADING RECAP

1. Precision FX – PFX had an ok, or good month depending on which broker you had an account with. January we witnessed Sparen pulling the better month. February we witnessed Inovatrade pulling the better month, by a significant amount. While this was not ALL attributed to broker differences this month, we have calculated that approx 6% was. But this number is hard to calculate. This is our one system that is EXTREMELY sensitive to brokerage conditions. Price action, tick data, chart data and spreads all play a major major role in this system’s performance; therefore the brokerage firm in which it trades at has a significant impact on its performance. This is why we cannot trade at most bucket shop or white label firms. We need special conditions. This past month we noticed some of our largest worst case scenario stop losses early in the month on eurusd and audnzd at Sparen, while we did not catch these at Inovatrade. Some of these came within a pip or two of dodging the SL at inovatrade, while they hit in full force at Sparen FX. A couple full SLs over the span of a month can have a significant impact on overall performance. But that coupled with the fact that we had a couple of evenings of downtime at Sparen because of a server upgrade, and a VPS upgrade on our end, caused some missed profits which were in fact realized at Inovatrade, further causing the discrepancies which ended up being rather significant this month. Sparen PFX was able to dig itself out during the month to break even, where Inovatrade did not have any digging to do. We have some good solutions in place to tighten any future discrepancies going forward, but for a sensitive system like PFX, we may always have a variance from one broker to the next.

March has gotten off to a rocky start at both brokers experiencing some attitude from the Swiss pairs. We are carefully looking for clear signs of the Swiss National Bank's (SNB) intervention on the fundamental side of things as they have done many times in the past - especially on the EURCHF. They intervene and manipulate this pair simply because this one exchange rate alone can make or break Switzerland’s export industry. Our system is well diversified enough outside of the Swissy pairs that if we have to turn them off for a while we will. But things seem ok as we slowly started scalping on them again later in the week. We will play it cautious this month. We have had a nice 9-10 month winning streak with PFX and hope to continue it for as long as we can, although we do understand that our profit periods often run in cycles from time to time. In other news we have had a new indicator programmed into a sub-strategy and trading live on PFX right now. This has been a long-time coming, and we believe that it will further diversify our system, and bring an added layer of diversification and another tool in this system’s wide arsenal of sub-strategies.

2. Chrome FX – CFX had a rocky start last month, but ended up coming out as one of our top performers in February. We are going “back to the basics” with this system, simplifying things, and rolling out some of it’s original strategies (revamped) that we used to trade on this system back in 2008. That along some other improvements after much collaboration have been successfully implemented back into the core Chrome strategy, and we look forward to getting this system into a very nice long and profitable winning streak as we know it has the full potential too. This system also felt some tribulations with the Swiss pairs as did PFX early this month, but has the potential to bank a few % in a day. This system has always been, and still remains as one of our more aggressive strategies. While it has the possibility to bank some of the largest profits, it also has the ability to see larger swings in equity in the account. We would like to ensure that all of our clients understand this, and use this system to their advantage as such in their diversified FX portfolios.

3. McLaren FX –  McLaren FX had another rather quiet month in February. It had a back and forth month, of wins and losses and came out just above break even. Out of all of our systems, this is considered our “longest term” system. Longest term in that it goes through quiet periods, and then once market conditions line up properly for a good run, it churns out some very handsome profits. So when we say long-term we mean those who are invested for certain periods of time will take advantage of the cyclic profit eruptions when they occur.  The developer of this strategy is working on a very nice compliment to this system, in terms of a shorter-term diversification strategy. We think that this system is prime for a short term sub-strategy and are eager to get it implemented and tested and eventually rolled out. This is a bit of a process, but one we are quite excited for. This is a system which is not near as broker sensitive as PFX is for example. Different chart data and especially indicator values will certainly impact this one. But the price action and spreads are not nearly as much of a concern. Once again, although it is not as “action packed” as some of our other higher frequency strategies, it is one of our more powerful and stable longer term systems and a great diversification cornerstone to all of our investor’s FX portfolios which we highly recommend.

4. Vega FX –  Vega FX was perhaps one of the biggest shockers to us this month, coming in last place out of all the core systems. This system has had such a phenomenal run lately, that we were beginning to wonder when or even IF we would see a down month. Sure enough we experienced it this month. Market conditions in Feb changed for the worse for this strategy, and we experienced it constantly struggle throughout the month, and it was not able to easily pump up its flat tire as quickly as it normally does or with as much ease. This was a disappointment for us, and the timing never fails us as this had happened the first month that we rolled this out to our investor base. This timing was perhaps one of the more frustrating facts for us, almost more so than the drawdowns. When a negative month will hit… we will never know for sure. The only thing that we do know for sure is that they certainly will strike from time to time, it’s just a matter of when. And that pertains to every system, strategy, and asset class out there. Although this cumulative drawdown was a little higher than we personally liked to see, we will keep a very close eye on it going into March. If the system continues to struggle, we will either punt it, or “put it in the shop” to see where it can improve. But we have no indication yet that this will be needed. We are relying on the historical and statistical ability for it to recover quickly and remain profitable in the long-term. It has had a better start to March so far and we are looking to recoup last month easily and safely this month.

INFORMATION AND NEW DEVELOPMENTS

1. Broker Discrepancies and Other Broker Issues – We must again bring this up as we get a lot of inquiries about this. As you may or may not know we are now trading most of our systems at 2 brokerages, and very soon it may be 3. When conducting any type of systematic trading (especially with any type of scalping strategies), you will hardly ever (very very rarely) have the same results. This month we noticed a sizeable difference on our Precision FX strategy between brokers, while the other systems were hardly affected at all. Until we have this standardized at a single brokerage, we may always have to contend with this.  This again definitely raises some concerns and begs some major questions from clients such as which broker produces the best returns? Where should I put my funds? This is a hard question to answer as every brokerage has certain strengths over others, and this not only varies from month to month, but form minute to minute. One day our feed can be much better at one broker, and the next better at another. This has to do a lot with the liquidity providers, the data, but mostly with the platform bridge provided by the brokerage. We really do not expect to see such large variances typically as we have seen on PFX this past month. Most of the time we should not be out by more than a few percent at most. But there may very well be times like this when larger discrepancies occur depending on what materializes in the markets over the course of the month. Although we feel in the long term this will even itself out well, clients who are concerned about these discrepancies can always diversify across brokerages. We have a 3^rd brokerage close to coming out of a very long testing phase which may further add to the mix, but we feel its important to have different brokerage options for clients to diversify into or choose from as well. We are looking at a few different solutions which may really help to standardize things going into April. We won’t get into these details yet as it is still somewhat early, but we may have the ability to copy trades from one brokerage to another and obtain identical results. There are a few variables at play though which make this tricky and requires in-depth testing on our part which we have already begun.

Withdrawals at Sparen FX – There were a few stragglers who had pending withdrawals at Sparen FX last month who were taken care of, but we were notified last month of a few more. If you are currently waiting on a pending withdrawal for a lengthy period of time, please email us to let us know, as we are working with the director and accounting group to ensure everything is taken care of as speedily as possible. We realize that this has been frustrating to a few of you who needed funds in a hurry, and we have been told that there are some new measures put in place to ensure a back log doesn’t occur again. Sparen had for the longest time catered to larger institutional clients only, where the majority of funds were on deposit directly at their liquidity providers. They historically would issue all withdrawals within 30 days. They have since grown quite large on the retail side of things, and need to make some adjustments to account for a larger number of “in and out” deposits required by the recent influx of retail investors. We have been advised the company is implementing a cash float LOC to be used for the swift “in and out” transfers required on the retail side of their business. Until this has been completely implemented (which we are told will be this month), clients may still see slight delays and we ask to plan ahead. Once their float has been put in place, clients should see “same day” outbound transfers which will be very nice. This float model is very common amongst retail firms. There has been a lot of transition taking place with this brokerage including new staff (and removal of some old staff), new feeds, and some unique new services as well. The float for retail will be a nice added touch in our opinion. Working with multiple brokers will give our clients more options to take advantages of different strengths and options from one broker to another, and this is something we are very focused on at the present time.

2. Possible Change to Performance Fee Periods - Some of our clients have written us suggesting a change in our performance fee periods, from monthly to quarterly. We are always open to such suggestions from our investors and encourage this kind of feedback. We have looked at this very seriously and we may soon implement such an option for investors to switch this period to quarterly as apposed to monthly.  This appeals to us as well in a few different ways in that that we have always focused on longer-term periods of investment. We can also get this in sync with our monthly audits. It will also cut down on our admin and accounting work load each month-end which at this point is enormous. This provides a huge advantage to investors in that it will allow for much longer investment durations (quarterly as apposed to monthly) which enables taking advantage of the benefits of compound interest more and thus provides a greater net ROI to investors over time. We are unsure when or how we will implement this at this point, as we will have to tweak our month end accounting plug-ins to accommodate it. Should we switch to this cycle, we would in turn expect clients to keep funds on deposit for the quarter. Early withdrawals would perhaps be subject to a fee, as to counter balance interrupting the quarterly invoicing cycle. We are not sure how we could best implement this yet. But we will look to possibly have at least an option in place by the end of Q2. We need to fully review this strategy and ensure it makes sense for everyone. Monthly performance fee deductions ensure our company has adequate cash flow for our team, strategists, programmers, and our R&D (which is quite large and pricey) so we will need to look at it from all angles. More on this topic in our subsequent updates!

SUMMARY AND GOALS FOR 2011

We are happy to report a positive update and profitable month once again this month to our clients. Markets have been both tough and very “tricky” so far in 2011, and adaptability is clearly the name of the game. We have a nice set of diversified FX systems, each further diversified themselves with unique tools and strategies and we feel taking a diversified approach is not only the best but safest approach to long-term success in the FX markets. Because of this we encourage all of our clients to follow this protocol and construct a small portfolio across our systems when participating with us. As some of our systems may from time to time go through periods/cycles where they struggle with market conditions, the diversified approach keeps the “boat afloat”.  We don’t claim to know it all, but this has proven itself to be the best time-tested method to mitigate the risk of overall loss. Our primary focus is on longevity above all us, and the steady and gradual growth of our equity has been best achieved through proper non-correlated diversification.

We are looking forward to heading into a profitable month ahead of us in March.  As always we will do our best to communicate with our investor base whether in the form of monthly updates, or on a “per needed” basis as we go through the month on any issues which may present themselves. Please visit our website and blog (http://cayoflow.blogspot.com/) for frequent updates and newsletters (note: we are always adding new content to our website) and do not hesitate to contact us at any time should you have any inquires or concerns you would like to discuss with us.

Thank you to all our current investors for your trust once again in trading with us.

Warm Regards,

The CayoFlow Team