Summary

The Investment Methodology currently used by the Advisor has been consistently applied since the mid 1970's. As Trust Investment Officers at First Alabama Bank, Mr. Witter and Mr. Lester recognized that equity investments over time have provided superior returns. The challenge was to produce consistent total returns despite the volatility associated with equity investments. With that in mind, the Advisors developed a warning system designed to identify any potential for a sharp stock market decline. The following criteria proved to have the highest correlation with changes in market direction: (1) Momentum - Prior to a short term change in the direction of stock prices, the momentum of the existing trend will slow perceptibly. In other words, before a market declines, it must stop going up. Momentum is measured by mathematical relationships involving the daily number of stocks that advance and decline, the number of issues making new highs and new lows, and divergences among the numerous market indices. (2) Volume - Price movements in a stock are often preceded by a change in the daily trading volume of its shares. Using the Dow 30 Stocks as a market proxy, the Advisor believes that changes of volume patterns in the Dow stocks indicate a future change in the direction of stock prices in general. (3) Inventory Accumulation and Liquidation - Inventory control is essential to any business, and the stock market is no different. Professional traders are keenly aware of trading conditions and the supply-demand factors affecting the market place on any given day. An analysis of each day's trading volume gives information as to whether this knowledgeable group of investors is accumulating or distributing shares. The first application of the Advisor's methodology was a simple mutual fund timing strategy. Begun in 1979 while the Advisors were serving as Trust Investment Officers at First Alabama Bank, this program was designed for the conservative investor whose risk tolerance is very small. Unleveraged "long" positions were taken only in market environments that the Advisor judged to be free of potential weakness. "Cash" positions were held in all other environments. Since then, the Advisor's trading methodology has been applied to a variety of different strategies. STOCK INDEX FUTURES TRADING PROGRAM In 1982, the Stock Index Futures Trading Program was created by applying the Advisor's traditional market analysis to the newly created Stock Index Futures market. Utilizing the added liquidity of the futures contract, the program is designed to more aggressively seek above average total returns. In addition to "long" and "cash" positions, the Stock Index Futures Trading Program offers the opportunity to profit from market declines. The prudent use of leverage may also serve to enhance returns. The Advisor started trading client funds in September 1983. From 1983 to March 1988 the Advisor was exempt from registration under Section 4.(M) of the regulations. Registration as a CTA was effective in March of 1988. INTERMEDIATE TRADING PROGRAM With the Stock Index Futures Program approaching capacity, the Advisor began to explore new applications for the market timing model. The Intermediate Trading Program combines the most successful elements of the Advisor's existing programs into a single, dynamic strategy. The Intermediate Trading Program takes both "long" and "short" positions by focusing on a 2-3 week stock market outlook. Daily indicators aid in order entry and risk control. Options are used to soften volatility while providing an element of yield enhancement. Leverage has been adjusted to produce an optimum risk/reward profile.The Intermediate Trading Program is currently closed to new investors. THE REDSTONE PROGRAM The Redstone Program stems from a research effort begun in 1993 to automate the interpretation of traditional Witter & Lester market analysis. This effort was guided by Lon Witter with the assistance of Wayne Whaley. After the initial exercise was completed, Mr. Whaley used computer optimization to incorporate several additional indicators that had been used successfully in his own personal trading since 1988. The resulting stock market model is based on pattern recognition of the following nine indicators: 1) Candlestick theory 6) Put/Call ratio 2) Climax Indicator 7) Seasonal variable 3) Volume trends 8) TRIN 4) Momentum 9) Valuation/Sentiment 5) New high / lows Each day the market timing model produces a rating between 0 and 100 where a rating above 52.5 is bullish and a rating below 47.5 is bearish. This daily analysis drives the degree of long or short exposure taken in the program each day. Positions are built using a combination of stock index futures and options. REDSTONE INSTITUTIONAL PROGRAM The Redstone Institutional Program was created at the request of a client. The program is traded parallel with the Redstone Trading Program with 2X leverage.