A. The Advisory Firm Capital Fund Management S.A. (“we”, “us”, “our” or the “Firm”) provides discretionary investment management
services to US and non-US clients from its offices in Paris, France. Founded in 1991, we are today registered
with the US SEC as an investment adviser, with the US Commodity Futures Trading Commission (“CFTC”) as a
commodity trading adviser (“CTA”) and commodity pool operator (“CPO”), and we are a member of the National
Futures Association (“NFA”) in such capacity. In France, we are regulated by the Autorité des marchés financiers
(“AMF”) as a UCITS portfolio management company in accordance with Directive 2009/65/EC of the European
Parliament and of the Council of 13 July 2009, as amended.
Today, the Firm has five wholly owned subsidiaries: Capital Fund Management International, Inc. (“CFMI”), CFM
North America, Inc (“CFM NA”), CFM Asia KK, CSysNet and CFM Corporate Member Limited. CFMI and CFM
NA are both limited liability companies incorporated in Delaware, USA. CFM Asia KK is a Japanese kabushiki
kaisha (stock company). CSysNet is a French corporation. CFM Corporate Member Limited is a limited company
registered in England and Wales, which holds the majority stake in Capital Fund Management LLP (“CFM LLP”)
and manages the operations of CFM LLP based on a broad power of attorney.
CFMI has offices in New York and contracts with us to interface with investors in investment funds we advise
and maintains certain of the IT infrastructure we keep in the United States. CFMI does not provide investment
advice. CFMI has contracted with Foreside Financial Services LLC (“Foreside”), a SEC-registered broker-dealer
and member of FINRA, for the purpose of registering certain employees of CFMI’s Investor Relations team as
representatives of Foreside that are permitted to engage in marketing activities in the United States. CFM NA is
the managing member/general partner of certain funds organized as Delaware limited liability companies or
offshore partnerships that we advise. CFM NA is registered with the CFTC as a CPO and is a member of the
NFA. CFM NA has delegated its powers and authority under the governing agreements to various service
providers, including to us to act as an investment adviser and to CFM LLP to act as a private fund adviser. CFM
Asia KK has offices in Tokyo, Japan and contracts with us to facilitate communications with investors and
potential investors in funds we advise and to interface with investors and potential investors in Japan and Asia.
CFM Asia KK does not provide investment advice. CFM Asia KK is registered as a Type II Financial Instruments
Firm and an Investment Advisory and Agency Firm with the Japanese Financial Services Agency. CSysNet acts
as a purchaser of IT equipment for the Firm and its affiliates. CFM Corporate Member Limited has offices in
London and manages the operations of CFM LLP based on a broad power of attorney. CFM LLP has offices in
London and operates a branch office in Sydney. CFM LLP provides investment management services and is
registered with the UK Financial Conduct Authority (“FCA”) as an Alternative Investment Fund Manager (“AIFM”)
pursuant to Directive 2011/61/EU on Alternative Investment Fund Managers and has filed with the SEC as an
exempt reporting adviser operating from outside the United States. For funds where CFM LLP acts as an AIFM,
CFM SA will generally be appointed as a portfolio manager.
The principal owners of the Firm are Jean-Philippe Bouchaud (Chairman), Philippe Jordan, Marc Potters (CIO)
and Jacques Saulière (CEO), all of whom are also board members and investment committee members of the
Firm. We are a privately owned company, majority owned by the board members and staff. Dyal Europe Holdings
Limited owns through a UK based vehicle a minority stake in the Firm. The Firm and its subsidiaries employ
approximately 290 staff in Paris, New York, London, Sydney and Tokyo, divided between Research, Data, Front
Office-IT, Operations-IT & Risk Control, IT-Infrastructure, Operations, Legal & Compliance, Administration and
Investor Relations.
The clients to whom we provide portfolio management services invest in accordance with our Stratus, CFM
Institutional Systematic Diversified (“CFM ISD”), CFM Institutional Systematic Equity MN (“CFM ISE MN”), CFM
Institutional Systematic Behavioral (“CFM ISB”), CFM Ensemble and CFM Global Equities Dynamic Beta
(“GEDB”) programs. All Stratus and CFM Ensemble clients are organized as private funds. CFM ISD, CFM ISE
MN, CFM ISB and CFM GEDB are available in a private fund format and as managed accounts for clients with
account balances above US$150m. The Firm also operates three managed futures programs, Discus, CFM
Institutional Systematic Trends (“CFM IST”) and CFM Institutional Systematic Trends Equity Capped (“CFM
ISTEC”), whose clients are mainly organized as investment funds. CFM IST, CFM ISTEC and CFM ISD are also
available as separate managed accounts for clients with account balances above US$200m. After being
restructured, Discus was reopened to new subscriptions as of June 2019. Stratus is closed for further investment
from new subscribers. Stratus may occasionally accept subscriptions in order to replace redemptions.
B. Advisory Services We use a systematic/quantitative approach to trading the financial markets. All of our strategies fall within what
is often referred to as “alternative investments”. Stratus and Discus are “hedge fund” strategies that seek to
capture “alpha”, i.e. returns that are skill-based and seeks to be uncorrelated with traditional market indices. CFM
ISD, CFM IST, CFM ISTEC, CFM ISE MN, and CFM ISB (collectively “CFM IS”) may be referred to as “alternative
beta” strategies that seek to follow widely documented hedge fund strategies. CFM Ensemble operates as an
allocation to Stratus and CFM ISD. CFM GEDB is a quantitative long only equity strategy seeking to outperform
global equity benchmarks on a risk adjusted basis.
The Firm primarily trades futures, foreign exchange, securities (equities, fixed income and exchange traded
funds), options, credit default swaps, as well as derivatives on all of the foregoing underlyings, in leading financial
centres in the US and internationally. Our strategies are global in nature and focus on trading in liquid financial
instruments generally available on exchanges, electronic platforms or in certain cases liquid markets that are
dealer focused. Such liquid instruments are generally “easy to value”. We also participate in OTC markets, where
we trade privately negotiated options contracts and credit default swaps, and may start to trade interest rate
swaps in the future. The OTC activity remains small compared to the overall activity of the Firm. In addition,
certain of our securities trades may be considered as OTC as they are financed synthetically as swaps. Such
swaps (foreign exchange forwards, options, credit default swaps and equity swaps) held by our private fund
clients are all valued based on quotes from central counterparties, electronic platforms, brokers or by service
providers appointed by a third party administrator for the purposes of determining the applicable private fund’s
NAV. The investment strategies of, and other material information about, each private fund are set forth in each
private fund’s offering documents provided to investors in such fund at or prior to their investment.
We have invested significant resources in developing our proprietary technology platform for trading decisions,
execution, post-trade processing and risk management. We carry out materially all of our trading electronically
on exchanges or electronic platforms either through direct market access through brokers or through exchange
memberships. Only a small share of our trading is carried out manually in the OTC markets over electronic
screens, chat, email and/or telephone. Our systems support straight-through processing of substantially all post-
trade activity. Our own in-house IT engineers develop and maintain all core software we use to operate our
business and trading.
C. Tailoring of Advisory Services We currently manage eight trading programs: Stratus, Discus, CFM ISD, CFM IST, CFM ISTEC, CFM ISE MN,
CFM ISB and CFM GEDB. In addition, CFM Ensemble operates as an allocation to Stratus and CFM ISD.
Stratus is a quantitative trading program providing exposure to our “hedge fund” strategies including directional
trading, intraday trading, directional volatility, statistical equity arbitrage and statistical volatility arbitrage. Stratus
trades futures, foreign exchange, sovereign debt as well as equities, listed options, credit default swaps and
derivatives on all of the foregoing. Stratus is included in our regulatory assets under management (“RAUM”) as
well as in our Form PF. Stratus is closed for investment, and accepts subscriptions only in order to replace
redemptions.
Discus is a managed futures program focusing on directional trading in futures and foreign exchange and does
not invest in securities. Discus has been reopened for subscriptions as of June 2019. As Discus does not include
securities in its portfolios, we have excluded this program from our RAUM. We report, however, commodity pools
trading in accordance with Discus on Form PF on a voluntary basis.
CFM ISD was launched in January 2014 and is an alternative beta program focusing on widely documented
hedge fund strategies such as trend following, equity market neutral, short volatility and carry. In CFM ISD we
seek to include alternative beta strategies that have been shown to be persistent over time. CFM ISD trades
futures, foreign exchange, as well as equities, listed options, credit default indices and derivatives on all of the
foregoing. Since the beginning of 2015, private funds trading in accordance with CFM ISD are included in our
RAUM and is reported on Form PF.
CFM IST was launched in January 2013 and is a managed futures program focusing on trend following by trading
futures and foreign exchange. CFM IST does not include securities in its portfolios and is therefore not included
in our RAUM. We report, however, commodity pools that trade in accordance with CFM IST on Form PF on a
voluntary basis.
CFM ISTEC is a managed futures program focusing on trend following by trading futures and foreign exchange.
The program is different from CFM IST in that its equity beta exposure is to be capped at zero relative to the beta
of a portfolio of global equity indices. CFM IST does not include securities in its portfolios and will therefore not
be included in our RAUM. We will, however, report commodity pools that trade in accordance with CFM ISTEC
on Form PF on a voluntary basis. The first client trading in accordance with CFM ISTEC is expected to receive
seed funding in April 2019.
CFM ISE MN was launched in March 2016 and is an alternative beta program focusing on widely documented
equity market neutral strategies. CFM ISE MN trades equity securities and derivatives on securities. Private
funds trading in accordance with CFM ISE MN are included in our RAUM and reported on Form PF.
CFM ISB was launched in March 2016 and is an alternative beta program focusing on widely documented trend
following and equity market neutral strategies. CFM ISB trades futures, equity securities and derivatives on
securities (and may trade foreign exchange forward contracts in the future). As of 31 December 2019 CFM no
longer manages private funds trading in accordance with CFM ISB.
CFM Ensemble was launched in January 2018 as an allocation to our Status and CFM ISD programs. The private
fund trading in accordance with CFM Ensemble realizes its investment objective through investments in two
master funds trading in accordance with Stratus and CFM ISD, respectively. The private funds trading in
accordance with CFM Ensemble are included on our Form PF as a part of the RAUM of CFM Ensemble.
CFM GEDB was launched in April 2018 and is a program focusing on global equity markets strategies. CFM
GEDB takes long positions in single equities modulated by an equity futures exposure. CFM GEDB trades a
variety of financial instruments including equities, equity derivatives and futures on equity underlyings. Private
funds trading in accordance with CFM GEDB are included in our RAUM and reported on Form PF.
We generally implement our trading programs in a similar manner for all investors. For the Stratus master fund,
there are private feeder funds available for US and non-US investors (also available to certain tax-exempt US
investors). The CFM ISD and CFM IST master funds are currently fed by two private feeder funds established
for non-US investors and one feeder fund established for US investors. CFM ISE MN master fund is fed by a
private feeder fund established for non-US investors. CFM Ensemble is available as a private feeder fund for
non-US investors. The CFM GEDB master fund is currently fed by a private feeder fund established for non-US
investors. Certain of the feeder funds established for non-US investors may also accept investment from tax
exempt US investors. Depending on the structure, the feeder funds may offer shares or partnership interests to
investors. For convenience, these are both referred to herein as “interests”. Our client feeder funds generally
offer both US$ and EUR interests in order to allow investors to choose base currency. Certain feeders also offer
interests denominated in AUD, CAD, GBP and/or JPY. In addition to the private funds and commodity pools
discussed above, the Firm also advises certain Non-US funds that do not accept US investors. Such non-US
funds are not included as a part of our RAUM and are excluded from Form PF.
As of the date of this document, we advise one separately managed account that trades securities for a US
person.
D. Wrap fee programs We do not participate in any wrap fee programs.
E. Assets Under Management As of December 31, 2019, we managed total client assets of US$9,332.7m in leveraged equity corresponding to
US$$7,673.4m in net assets. Our RAUM, which only includes portfolios available to US Persons that trade
securities, comprises a total leveraged equity of US$7,062.7m corresponding to net assets of US$5,598.8m. The
above figures are reported in accordance with US GAAP. We managed all of this RAUM on a discretionary basis.
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A. Compensation for Advisory Services Our fees are established by the investment advisory agreements we enter into with each of our clients who are
private funds and which are disclosed in the offering materials of each fund. We generally receive a management
fee calculated at a rate per annum of net assets under management and a performance-based compensation
equal to a portion of the increase in net asset value of the client’s account adjusted for carry forward profit/loss,
and subscriptions and withdrawals. Our fees are generally non-negotiable, but in limited instances we may vary
our fees depending upon a variety of factors, including investing early in or seeding a new strategy, the size of
an account or the overall relationship with the client or investor.
For CFM IS we have established a fee grid (the “Grid”), where investors and in certain cases groups of connected
investors that have subscribed for amounts above a certain AUM level may benefit from more attractive fee terms
than those set-out in the offering documents of the applicable private fund. Although the Grid terms are
documented through private fee letters that may be specific to the situation of each investor, we endeavor to
apply such terms to investors on a uniform basis.
B. Billing of Compensation for Advisory Services The administrator for each private fund client handles the calculation of our advisory services fee and we must
confirm such fees before payment. After such confirmation, we may instruct a custodian holding an account of
the relevant private fund client to pay us our fee. We may charge different fees to different classes of shares or
series of interests. The private funds accrue management fees weekly or monthly in arrears with a monthly
payment cycle. Funds managed in accordance with our Stratus program generally pay us monthly 1/6th of the
accrued performance-based compensation. Until October 2019, investments in Discus were subject to a a
quarterly incentive fee. Since October 2019, incentive fees are payable annually as of the last Valuation Day of
September of each calendar year. The performance fees of private funds following one of the CFM IS programs
or CFM Ensemble are accrued at each valuation date of the respective fund and crystallize on an annual basis.
Funds following CFM GEDB do not generally pay performance fees. The performance-based compensation is
paid in arrears.
C. Other Expenses The offering documents of each private fund that we advise set forth other expenses charged to such funds.
Generally, the private funds pay all of their own ongoing fees, costs and expenses including, but not limited to,
the fees of a third party administrator, the fees of the directors and operating expenses incurred, which include
legal, auditing, registration, company secretarial, licensing, stock exchange listing fees, brokerage commissions,
stock loans, governmental filing fees, insurance and printing costs. Further, clients that are feeder funds feeding
into a master fund will also bear their pro rata share of any expenses of the master fund in which they invest as
these are included in the change in net assets of the respective master fund. The Firm generally pays the initial
organizational expenses of the private funds that it advises and does not expect to recover such costs. The Firm
may, however, be reimbursed for approved out of pocket expenses. For certain of the CFM IS funds as well as
funds following CFM GEDB strategy, the investment advisor of the respective fund has agreed to compensate
ordinary other expenses charged above a set limit, typically set at 10bps, 15bps or 20bps of leveraged equity
per annum.
The prime brokers, executing brokers, any custodians and other counterparties to our clients will receive such
fees, rates and commissions as may be agreed with the clients from time to time. Our policies and practices with
regard to the selection of brokers are discussed below under Item 12 “Brokerage Practices”.
In order to optimize the quality of execution, we have spent considerable resources on developing systems and
technology for executing our clients’ trades through direct market access. In certain derivatives markets, the Firm
executes trades directly on markets as an exchange member or market participant. No brokerage commission
is payable on such trades when they are passed to an execution venue directly without the use of a broker.
D. Advance payment of fees We do not collect any fees in advance. We charge fees weekly, monthly, quarterly or annually in arrears.
E. Compensation for the sale of securities or other investment products We do not receive any compensation for the sale of any securities or other investment products to clients.
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Our fees generally include a performance-based fee, which may be charged monthly, quarterly or annually in
arrears based on the realized and unrealized gains of the respective funds. Performance fees are generally
charged at 20% or more of trading profits for Stratus, 20% for Discus and CFM Ensemble and 10% for private
funds following CFM IS. CFM GEDB does not currently charge performance fees. A significant portion of our
total compensation comes from performance-based fees related to our alpha business, which we believe aligns
our interests with that of our clients, but which may also give us an incentive to engage in higher risk investing to
increase performance than would be the case without performance-based fees.
The fee Grid applicable to investors in certain CFM IS funds includes fee terms different from those set-out in
the fund offering documents, including a choice of the level of performance fee (0%, 10% or 20%) with a
correspondingly higher or lower management fee. Once an investor has opted for a certain performance fee
level, it may no longer be changed except through a full redemption and a subsequent subscription.
We advise certain clients with overlapping strategies. In such instances, we may place bunched orders and
allocate positions purchased or sold among the participating clients. All trades executed in futures, foreign
exchange forwards and options (that are not securities) are allocated post-trade. Securities trades for Stratus
and GEDB are allocated pre-trade whilst securities traded for funds and accounts following CFM ISD or CFM
ISE MN are allocated post trade. We design our post-trade allocation procedures with the aim of treating clients
on an equitable basis over time. We generally receive similar performance-based compensation from all of our
clients participating in each allocation and therefore do not believe that differences in compensation form an
incentive to allocate trades to any particular client. Our policies and practices with regard to trade allocation are
discussed more in detail below under Item 12 “Brokerage Practices”.
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The Firm only provides securities investment advice to private funds that are open to sophisticated institutional
investors. All US investors having an investment in a private fund client must be accredited investors, as defined
in SEC Regulation D, and qualified purchasers, as defined in the Investment Companies Act of 1940. The
investors in the client funds are generally institutional investors such as pension funds, funds of funds, private
funds, insurance companies, private banks and other significant financial services providers. A small share of
investors in client funds are family offices, high net worth individuals or other qualified individuals. Most individual
investors in our private funds are employees. From the beginning of 2016, the Firm started to also offer account
management for ERISA plans.
The minimum investment in Stratus, Discus, CFM ISD, CFM IST, CFM ISTEC, CFM ISE MN, CFM ISB and CFM
GEDB is set at US$1m. The minimum investment in CFM Ensemble is set at US$40m. The minimum account
size for accepting managed accounts following one of the CFM IS strategies is set at approximately US$200m.
We do not currently offer managed accounts following Stratus or Discus.
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Loss A. Investment Strategies The Firm’s investment strategies originate from our global and quantitative approach to financial markets and
rely on in-depth statistical analysis of large scale sets of financial data for asset allocation, trading decisions and
order execution. We implement our investment strategies through automated trading programs operated on our
IT infrastructure, which includes data feeds, engines for decision making and risk control, order management,
connectivity to markets as well as post-trade processing facilities and accounting. Our trading style can be
characterized as “algorithmic” or “quant”. Data inputs used in developing our strategies are mainly prices and
public corporate & economic information. The cost of data is borne by the Firm, except when such data is
received as a part of the trade execution process.
The overall investment strategies, risk management, implementation of new models and risk allocation decisions
are made by the Investment Committees for Stratus and for CFM IS, which comprise our five board members,
the head or co-head of each of our trading strategies, the head of execution, the portfolio managers, the head of
legal & compliance and the person responsible for independent risk monitoring (approximately [12] persons
overall, respectively). The Investment Committee of CFM IS currently also covers CFM GEDB.
We employ a team of Ph.D.’s - former physicists from leading institutions - and IT and data specialists to conduct
research in the statistical properties of financial instruments and to develop systematic trading strategies for use
with our clients. The Research team’s mandate for continuous development of investment strategies helps the
Firm to capture new sources of value and adapt its trading strategies to the evolving markets.
As discussed above, we currently manage eight trading programs: Stratus, Discus, CFM ISD, CFM IST, CFM
ISTEC, CFM ISE MN, CFM ISB and CFM GEDB. Stratus is a quantitative trading program providing exposure
to our “alpha strategies” including directional trading, intraday trading, directional volatility, statistical equity
arbitrage and statistical volatility arbitrage strategies. Discus is a managed futures program conducting trading
in futures and foreign exchange. CFM ISD focuses on “alternative beta” strategies, including trend following,
equity market neutral, short volatility, value and carry. CFM IST is a managed futures program focusing on trend
following. CFM ISE MN is an equity market neutral program. CFM ISB currently allocates to CFM IST and CFM
ISE MN on an equity risk basis. CFM ISTEC is an equity beta capped version of CFM IST including also faster
trend following models and a long volatility component. CFM GEDB is a long only global equity strategy
modulated by an equity futures exposure. Each trading strategy is based on a large number of individual trading
models, which focus on a specific type of trading opportunity. By combining a large number of models, ideally
un-correlated to each other, the Firm seeks to achieve an attractive risk-reward relationship for each of the
investment programs that are available to clients.
As the Stratus and Discus strategies aim to capture “alpha”, these strategies have limited AUM capacity. The
CFM IS strategies are “alternative beta” strategies that offer lower fees, enhanced transparency and are expected
to be less affected by capacity considerations. CFM Ensemble operates as an allocation to Stratus and CFM
ISD. CFM GEDB is expected to be the least affected by capacity constraints. Except CFM GEDB, our investment
programs seek to be uncorrelated to traditional asset classes in most market conditions. There is no assurance
that these investment programs will actually provide an acceptable return to investors or that the correlation
characteristics will remain stable. The investment programs are not intended as complete diversified investment
programs. Investing in securities and other financial instruments, such as those included in our trading programs,
involves a risk of loss that clients and investors in private funds should be prepared to bear.
B. Risk Factors Our trading strategies may involve high-volumes of trades, systematic trading, use of derivatives and heavy
reliance on IT systems. As with any investment program, clients and prospects should understand the risks
involved with the underlying trading strategy. Each investor and potential investor in a private fund client will have
received offering documents describing the features of that private fund and the risk factors applicable to the
trading strategy. Similarly, our trading advisory agreements generally include strategy descriptions and
applicable risk factors. Prospective investors should carefully consider the following risks as well as other risks
described in the offering documents for our private fund clients or trading advisory agreements for managed
account clients. Investors should carefully consider whether an investment in the Firm’s investment programs is
suitable for them in light of their sophistication, needs, risk appetite and financial condition.
No Guarantee of Profit. There is no assurance that the trading advice of the Firm will provide an acceptable
return or that investors will not incur substantial losses.
Past Performance. Past performance of the Firm, a fund or an account is not a guarantee of future results
attributable to any investment. The investment programs are based on statistical methods for determining target
positions and execution strategies in financial instruments, including derivatives. No assurances can be made
that a fund or account will generate returns in the future or that the strategies utilised by the Firm or a fund will
perform in the future. Historical results are neither a guarantee nor indicative of future performance.
Speculative Nature of the Investment Programs. The Firm’s investment programs are speculative and involve a
high degree of risk. There is no assurance that the technical and risk management techniques utilized by the
Firm, as well as the investment decisions made by the Firm, will not expose the client to risk of significant losses,
especially if the underlying patterns or market behaviour studied by the Firm and which provide the basis for its
statistical models change in ways not anticipated by the Firm. The Firm's investment strategies are subject to
market risk (which is the risk inherent to the entire market), each market segment as well as individual positions
and which may adversely affect the performance of an investment. In addition, an investor who redeems his/her
interest only a short period after subscribing, may not realize the amount originally invested as a result of charges
made at the issue and/or redemption of the interest.
Recession. A fund and the Firm’s investment strategies may be adversely impacted and may be significantly less
likely to achieve their objectives during any economic recession and/or general slowdown in the overall economy.
A fund and the Firm cannot predict whether any economic recession or general economic slowdown will occur,
continue, remain steady or worsen and no prediction or anticipation be made as to the duration of such conditions
or to any structural economic changes in the near-to mid-term future. Continued and/or prolonged overall
economic slowdown and recession and/or any such changes as may result could have a materially adverse
effect on the performance of a fund, an account, or the Firm and could negatively impact the liquidity of the
financial markets and the creditworthiness of the counterparties of a client.
Master-Feeder Fund Structures. The private fund clients advised by the Firm are generally structured as
master/feeder structures where each feeder fund realizes its investment strategy through an investment in a
master fund. The assets and liabilities of the feeder funds are generally held on a pooled basis. Similarly, the
assets and liabilities of each master fund are held pooled, in the sole name of the respective master fund.
Investors should be aware that in the event of such feeder fund or master fund incurs losses, creditors of the
feeder fund will have access to all of the assets of such feeder, and creditors of a master fund will have access
to all of the assets of such master, in satisfaction of their claims. In addition, in the event of insolvency of a feeder
or a master fund, the assets related to any interest shall generally be indistinguishable from each other. Such
master-feeder structures may involve cross-liability between interests.
Use of Leverage. We generally use leverage as part of our investment strategies. This generally results in
investment portfolios with market exposures that are significantly higher than the corresponding managed net
assets. Leverage may be acquired through positions financed by borrowings or by entering into instruments that
embed leverage. The use of leverage increases a client’s returns if it earns a greater return on investments
purchased than the position’s cost of financing. However, the use of leverage exposes the client to additional
risks, including (i) greater losses from investments than would otherwise have been the case had the client not
applied leverage, (ii) margin calls or interim margin requirements, which may force premature liquidations of
investment positions, and (iii) losses on investments, where the investment fails to earn a return that equals or
exceeds the position’s cost of financing. In the event of a sudden, precipitous drop in the value of the client’s
assets, a client might not be able to liquidate assets quickly enough to repay its obligations, further magnifying
losses.
Short Sales. We generally affect short sales of securities as a speculative position or as a part of a hedging
strategy. Short sales are transactions in which the client sells a security, which it does not own (by borrowing
such security), in anticipation of a decline in the market value of the security. Losses from short sales may be
unlimited if the price of a security sold short continues to appreciate. Additionally, even though a client takes
measures to secure a “good borrow” of the security sold short at the time of execution, the lending institution
may recall the lent security at any time, thereby forcing the client to purchase the security at the then prevailing
market price which may be higher than the price at which such security was originally sold short. There are
additional regulatory requirements in respect of short sales that may adversely affect the performance of an
investment.
Income. We generally only advise private fund clients that are structured to accumulate and reinvest profits,
losses and income. An investment in such vehicles is not suitable for an investor seeking current income and
distribution rather than longer term appreciation.
Trading Costs. Our trading strategies may entail a substantial volume of trading activity resulting in corresponding
brokerage costs, exchange fees, regulatory fees, clearing costs or other trading related costs being incurred.
Depending on the fund’s and an investor’s situation, trading may also cause a taxable event to occur each time
a financial instrument is purchased and /or sold. These increased expenses and potential taxes could lower the
overall investment performance of an investment.
Physical Delivery of Underlying in certain Derivatives Markets. The Firm’s programmes may involve trading in
various derivatives contracts in the commodities markets. Such contracts may involve special terms such as
physical delivery of the underlying at the maturity of the contract. Any failure to roll or close such positions may
lead to clients taking possession of a significant amount of physical inventory, which may need to be stored,
transported and/or liquidated. A physical delivery of a commodity position may involve significant costs and may
have a materially negative effect on the value of an investment
.
Counterparty Risks. Our investment strategies involve incurring exposure to the counterparty risk of issuers,
exchanges, clearing houses, brokers, prime brokers, banks, clearers and other counterparties. Counterparty risk
may incur for example due to: i) clients being general creditors to a counterparty, ii) counterparties re-
hypothecating the assets of clients, iii) assets being held in accounts that are not segregated from counterparties
(which may be true even for margin held in a derivatives account); iv) counterparties defaulting on settlement of
trades; v) trades being carried out on a synthetic basis or vi) assets being charged to counterparties through
pledges or outright title transfer. Even when assets are held in trust or under agreements that require segregation,
clients may experience short-falls as a result of for example: i) gross negligence, ii) operational failures, iii)
defaults of custodians or sub-custodians, iv) losses from assets of other clients held in a pooled account or v)
the existence of pledge or charging arrangements. In addition, in the case of failure of a counterparty, such trust
assets may take significant time to be released even when fully available. The default of any counterparty on an
obligation to one of our clients could lead to material losses to such client and to any underlying investors. Certain
standardized swaps are subject to mandatory clearing, and more are expected to be so in the future. The
counterparty risk for cleared derivatives is generally lower than for uncleared derivatives, but cleared contracts
are not risk-free.
Reliance on Technical Trading Systems. We base our trading decisions chiefly on statistical modelling and
technical analysis. The use of computers in processing information or in developing and operating a trading
strategy does not assure the success of the strategy as computers merely perform an automated processing of
data and trade information.
Changes in Trading Models, Risk Systems and IT Systems. The Firm has discretion to change and update its
trading models and risk systems, without the approval of the private funds clients and their investors. A change
in a trading model or risk system involves risks due to the difficulties in anticipating the future actual performance
of such new models or risk systems. There may also be risks with implementing new information technology
required to operate such new or existing models and risk systems. There are several risks in implementing new
models, risk systems, software and/or IT systems, including risks due to programming and/or technical errors.
New or updated trading models, risk systems, software or IT systems may not function as anticipated.
Information Technology Systems & Operational Errors. Our strategies are dependent on our investment
management services, as well as on data processing, communications, execution, securities processing and
back-office functions. The Firm depends on its and third party information technology systems in order to assess
investment opportunities, strategies and markets, to enter into positions and to monitor and control risks for the
clients. In addition, certain of the Firm's operations may interface with or depend on systems operated by third
parties, including exchanges, brokers, prime brokers, clearers and other types of trading systems, execution
venues, custodians, administrators etc.
It is possible that a defect, failure or interruption of some kind, which causes disruptions to these information
technology systems, including, without limitation, those caused by bugs, worms, viruses, cybercrime, hard ware
failure, communications failure and power failures could materially limit the Firm’s ability to adequately manage
investments, provide adequate risk controls as well as develop new trading strategies. Any such information
technology related difficulty could harm the performance of our clients. For example, such failures could cause
position keeping to be inaccurate, the settlement of trades to fail, lead to inaccurate accounting, recording or
processing of trades, and cause inaccurate reports, each of which may affect the Investment Manager's ability
to operate and monitor the Fund’s investment portfolios and risks.
Trade Errors. The trading advisory agreements among the Firm and our clients provide that the clients to which
we provide our services will generally be responsible for any losses resulting from their management, trading or
administrative errors in connection with their trading activities. Any gains or benefits that result from such errors
will also accrue to the clients. Given the volume of transactions executed by the Firm on behalf of its clients,
investors should assume that any such errors might occur, although the Firm does not expect them to occur
frequently. The Firm has also increased its trading activity in markets that require manual intervention at some
stage of the trading process, which may increase the risk of trading errors. Although the clients are responsible
for any losses as described above, the Firm generally expects to reimburse the clients for losses resulting from
trading or administrative errors resulting from acts or omissions constituting gross negligence, wilful misconduct
or fraud or such standard of liability as required under applicable regulations.
Allocation of Trades. Although the Firm has built systems that seek to allocate trades equitably between clients
over time, the performance of such allocation procedures is dependent on the general market configuration as
well as the procedures and systems used by counterparties. As a result of timing of individual trades, market
trends, liquidity, availability of systems, client specific requests, account size etc, the performance of an individual
client account or private fund may deviate substantially from that of other comparable accounts or funds following
a similar trading strategy. This may be especially the case when an account or fund is affected by subscriptions
or withdrawals or when comparing account performance on shorter time scales.
Increased Regulation. The holding of an investment in any of the private fund clients and the business of the
private funds, the Firm and the service providers of the private fund clients are subject to numerous laws and
regulations in multiple jurisdictions that may be difficult to interpret and that may be subject to change.
Governmental and regulatory authorities, including in the US and the EU, have taken unprecedented action to
attempt to stabilise financial markets and improve and increase regulatory oversight in response to events in
recent years, including the 2007 global financial market crisis. Attention has been focused on the need for
financial institutions, trading firms and private investment funds to maintain adequate risk controls, capital
reserves, reporting and compliance procedures. Events have also raised concerns and prompted regulatory
responses as to the manner in which certain exchanges and regulators monitor trading activities and protect
customer funds. Disruptions and adverse events in the equity, securitisation, derivative and money markets and
the freezing of the credit markets have increased the call for additional and consolidated regulatory oversight of
the global financial markets. As a result, the regulatory environment for private investment funds, counterparties,
service providers and trading firms (such as the Firm) is evolving, and the effect of any regulatory or tax changes
currently being implemented or which may be implemented in the future on a client of the Firm, the markets and
instruments in which a client invests and the counterparties and service providers with which a client conducts
business is difficult to predict and may cause for example increased costs, lower liquidity or decrease the
availability of service providers.
Tax Change. The tax consequences to the investors in the private fund clients, the ability of the private funds to
make investments as a foreign investor in certain markets, and the ability of the private funds to repatriate assets
including any income and profit earned on assets are based on existing regulations, which are subject to change
through legislative, judicial or administrative action in the various jurisdictions in which the trading program may
operate. NO ADVICE IS BEING PROVIDED AND NO REPRESENTATIONS HAVE BEEN OR ARE BEING
MADE (AND NONE SHALL BE INFERRED) BY A FUND, THE FIRM OR ANY OF ITS AFFILIATES WITH
RESPECT TO THE TAX CONSEQUENCES OF AN INVESTMENT IN A PRIVATE FUND CLIENT OR OF ANY
INVESTMENTS OR TRANSACTIONS ENTERED INTO BY THE FIRM FOR THE PRIVATE FUND CLIENTS.
Regulatory Change. The markets and instruments in which the private fund clients trade are undergoing
significant regulatory change in various jurisdictions. Changes in any of these regulations, incompatibility of
changes between jurisdictions, restrictions on certain trading strategies, or increased licensing and reporting
obligations could negatively affect the ability of the private fund clients to continue the trading programs or could
adversely affect the private fund clients and their investors. In particular, high-frequency, algorithmic trading,
over-the-counter derivatives and trading in various agricultural and energy commodities have been the subject
of increased regulatory scrutiny which could result in restrictive regulations that could adversely affect the private
fund clients and their investors.
Limited Ability to Redeem. Investors in the private funds advised by the Firm usually may withdraw assets
monthly on two months’ notice for Stratus and CFM Ensemble, approximately 15 days’ notice for Discus and
approximately 3 business days’ notice for private funds following CFM ISD, CFM IST, CFM ISTEC, CFM ISE
MN, CFM ISB and CFM GEDB. However, the directors of the private funds may have authority to suspend
redemptions in certain circumstances and may also withhold consent to the transfer of interests. Investors should
be prepared to hold their fund interests indefinitely.
Risks Associated with Performance-based Compensation. A substantial part of our compensation is comprised
of a performance-based fee. This may create an incentive for us to make more speculative investments than we
would otherwise make in the absence of such performance-based compensation.
Increased Regulatory Reporting. Mandatory regulatory reporting has been increasing and may involve
substantial cost on the owner of a managed account. A client who considers opening a managed account should
evaluate its systems, resources available for reporting as well as aggregate costs of reporting prior to signing a
trading advisory agreement with the Firm.
PLEASE NOTE THAT THE ABOVE-MENTIONED RISKS ARE NOT COMPREHENSIVE. PLEASE CAREFULLY
REVIEW THE RISKS APPLICABLE TO THE SPECIFIC STRATEGY CONTAINED IN THE OFFERING
DOCUMENTS FOR THE RELEVANT FUND OR THE RISK FACTORS OF THE RELEVANT TRADING
ADVISORY AGREEMENT OR THE RELEVANT INVESTMENT MANAGEMENT AGREEMENT.
C. Risks of Securities Recommended PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING TRADING INSTRUMENT
RELATED RISKS AS WELL AS OTHER RISKS DESCRIBED IN THE ‘RISK FACTORS’ SECTION OF EACH
PRIVATE FUND’S OFFERING DOCUMENTS. Investors should carefully consider whether an investment in a
portfolio including such financial instruments is suitable for them in light of their sophistication, needs, risk appetite
and financial condition.
Derivative Contracts. The Firm may recommend its clients to trade in derivative contracts, such as futures,
options, contracts for differences, equity swaps, credit default swaps, interest rate swaps and forward contracts.
Derivative contracts may involve additional risks, such as sensitivity to additional risk factors, documentation risk,
liquidity, short-exposures, reporting, embedded leverage, financing, margin calls, position limits and counterparty
risks.
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A. Broker-Dealer Activity The Firm or its subsidiaries do not engage in any broker-dealer activity. CFMI has, however, engaged Foreside
Financial Services LLC (Portland, Maine), which holds a Limited Purpose Broker-Dealer license, to register
certain of CFMI’s staff as registered representatives.
B. Commodity Interest Trading and Futures Activity We trade futures, security futures, options, foreign exchange and credit default swaps for our clients. We may
extend our trading to interest rate swaps and other instruments in the future. The Firm is registered with the
CFTC as a CTA; currently it operates all of its accounts pursuant to the exemption from certain disclosure and
recordkeeping requirements of CFTC Rule 4.7 applicable to accounts of “qualified eligible persons”. We and our
affiliate CFM NA have each registered as a CPO for the private fund clients we manage that are commodities
pools. We are a member of the National Futures Association and Marc Potters, CIO and a member of our board
of directors as well as Philip Seager, Head of Quantitative Investment Solutions Strategies, are both registered
with the CFTC as associated persons of the Firm. The key persons of the investor relations team of CFM NA are
registered with the CFTC as associated persons of CFM NA. The Firm is also registered as a swap firm and
Marc Potters and Philip Seager are registered as swaps associated persons.
C. Affiliations Jacques Saulière, CEO and board member of the Firm, also acts as a director of certain of the private funds
advised by the Firm. Similarly, Jacques Saulière acts as a director, president and secretary of CFM NA, the
managing member and the general partner of certain private funds advised by the Firm.
Philippe Jordan, board member of the Firm, also acts as a director and treasurer of CFM NA, the managing
member and the general partner of certain private funds advised by the Firm.
As explained above, CFM NA acts as a managing member or general partner of certain private funds we advise.
CFM NA would also be appointed as CPO for the same private funds. CFM LLP acts as an AIFM of certain
private funds for which it has delegated portfolio management to the Firm.
D. Selection of Investment Advisers Not applicable.
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Transactions and Personal Trading A. Code of Ethics The Firm has adopted a Group Code of Ethics governing personal securities trading by employees for their own
benefit and for their related persons. Employees are permitted to maintain personal securities accounts provided
that such accounts are disclosed to us and any personal trading is consistent with applicable law and the Code
of Ethics. Subject to compliance with the Code of Ethics, employees may buy, sell or hold, for their own personal
accounts, securities that we may also buy, sell or hold for our clients.
The Code of Ethics also contains policies and procedures that, among other things:
prohibit employees from taking personal advantage of opportunities belonging to clients,
place limitations on personal trading by employees and impose pre-clearance and reporting
obligations with respect to trading, and
require reports of securities holdings and transaction reports by employees.
The Firm’s Code of Ethics is available to investors upon request by contacting our compliance team at
compliance@cfm.fr.
B. Recommendations to clients, or buys or sells for client accounts of securities in which the Firm or a related person has a material financial interest The Firm and its staff are invested on a pooled basis with external investors in certain private funds we manage.
We believe that this aligns the Firm’s and its staff’s interests with those of clients and private fund investors and
view this as a beneficial arrangement.
C. Investing in the same securities (or related securities, e.g., warrants, options or futures) that the Firm or a related person recommends to clients The Firm, historically, had a practice to hedge certain foreign exchange exposures of its expected future
revenues. Although such hedging activity is not currently taking place, the Firm may in the future hedge such
foreign currency denominated revenue using similar futures contracts to those also held by clients.
D. Recommendation of securities to clients, or buys or sells securities for client accounts, at or about the same time that the Firm or a related person buys or sells the same securities for its own (or the related person's own) account Please see Items 11.B and 11.C above. Any subscription or redemption by the Firm or its staff in a private fund
is processed on the same dealing dates following the same procedure as the subscriptions or redemptions of
external investors. The pre-clearance procedure required to be followed by employees when investing in non-
exempt financial instruments provides transparency in relation to employees or related persons investing in the
same securities as recommended, bought or sold for clients.
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A. Selecting broker-dealers and evaluating commission levels We execute a vast majority of trades electronically over connections with brokers and exchanges. Bringing a
new execution venue to this electronic infrastructure is a significant project which may take several months of
preparation. The Firm executes a low volume of trades manually in OTC options, futures, foreign exchange,
interest rate swaps and credit default swaps and such trading may be extended to other asset classes in the
future. The Firm maintains an execution policy (as required under EU regulations) for selecting brokers as well
as directing order flow to brokers. The execution policy identifies several execution factors for selecting brokers,
the most important of which are cost, latency, quality of processing, likelihood of settlement and credit worthiness.
In general, we choose the brokers used to trade for private fund clients based on the principle of seeking to
obtain best execution while also accommodating our electronic order transmittal and other requirements.
1. Soft Dollars We do not maintain any soft dollar accounts with brokers. We may, however, from time to time receive research
services and/or other services from brokers free of charge. In the EU, brokers are subject to MiFID II limiting the
availability of any free research. In general, all services we receive from brokers that could be considered as soft
commissions are within the safe harbor of Securities Exchange Act Section 28(e), but according to our internal
policies we may accept other services when they are for the benefit of clients. As of today, the Firm does not, to
its best knowledge, receive any services outside 28(e).
2. Brokerage for Client Referrals Although we have at times received client referrals from brokers, this would not be a factor for selecting brokers.
3. Directed Brokerage We only execute trades through brokers with whom our clients have established accounts. Once the client has
opened the required accounts and authorizes us to trade in such account on its behalf, we will execute trades
only through those brokers who can accommodate our needs and investment style. The clients we advise
generally open accounts with brokers that we recommend, but there may be instances when clients direct the
Firm to use specific brokers. All such direction must be in writing from the client. A client who processes trades
through a sub-set of the available brokers or who appoints a third party broker for its execution or clearing
activities may potentially receive less favourable terms than clients that benefit from the volume discounts as
well as processing technology applied to the combined volume of the Firm’s clients.
B. Bunched orders We do not bunch orders of securities or options transactions for clients following Stratus. Futures and foreign
exchange transactions are traded in bunched orders and allocated post trade for Stratus and Discus in
accordance with an enhanced “CFTC high to low” allocation algorithm. The algorithm used by the Firm has been
enhanced in order to seek to allocate trades more equitably, especially in trending markets.
Since late 2014, the CFM IS programs have been trading certain securities and derivatives as bunched orders
that are allocated to clients post-trade. The markets in which this procedure is not followed are allocated pre-
trade. Futures (and in the foreign exchange transactions when being made available) are allocated post-trade
for clients following CFM ISD, CFM IST, CFM ISTEC, CFM ISB or GEDB. The post-trade allocation of equities
for CFM ISD, CFM ISE MN and CFM ISB is performed as an end of day average price allocation. The equity
trades of CFM GEDB are currently allocated pre-trade. Futures, options (and foreign exchange) are allocated in
accordance with an enhanced “CFTC high to low” allocation algorithm. The quantities included in trade orders
are allocated to clients on a preliminary basis pre-trade. Depending on the actual fills the allocation of the
executed trades may differ to the pre-trade allocation.
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A. Account Reviews Our operations staff reconciles all client accounts on a daily basis. The Head of Operations reviews all client
accounts on a monthly or on a weekly basis. In addition to continuous monitoring by the various research and
production teams, the Investment Committees of the Firm formally reviews the performance of all clients on a
monthly basis.
B. Client Reports The Firm sends monthly written performance reports to all clients and to investors in private funds. The investors
in the private funds receive monthly net asset statements as well as quarterly NAV transparency reports and
annual audited accounts. Apart from the monthly performance reports, reports are generally processed and
delivered by each funds’ third party administrator.
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The Firm may compensate third parties for prospective advisory client referrals (or referrals of private fund
investors) in accordance with applicable law. Written arrangements govern such compensation and are disclosed
to referred clients or investors. Generally, such fees would be proportional to the amount invested by the referred
advisory client or investor in a private fund during a pre-defined period of time. As of the date of this document,
the Firm has no such arrangements in the United States.
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We are deemed to have custody of certain client assets as a result of our authority to deduct advisory fees from
certain private fund accounts and through our related person, CFM NA, acting as managing member or general
partner of certain private funds. The Firm complies with the custody requirement of the SEC for all US private
fund clients by appointing third party qualified custodians to its private fund clients and sending audited financial
statements prepared in accordance with US GAAP to all investors in private funds within 90 days (the shorter
deadline compared to the standard 120 days SEC deadline is due to our obligations as a CPO) of the year-end
of the respective private fund. Investors are encouraged to review these and contact the Firm if they have any
questions. In 2019, a PCAOB registered accountant, KPMG, audited the financial statements of all off-shore
client private funds, and Cohen & Co. audited the financial statements of certain on-shore private funds. As an
advisor with its principal place of business outside the US, the Firm follows SEC guidance regarding the
application of the substantive provisions of the Advisers Act to its business and also applies those provisions
when relevant/practically possible to its non-US advisory clients.
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We manage all of our client accounts on a discretionary basis pursuant to client specific investment advisory
agreements. For client private funds where CFM LLP acts as an AIFM that generally follow one of the CFM IS
programs, CFM LLP would delegate such powers to the Firm. Our standard investment advisory agreement
grants us discretionary authority to trade for a client’s account in accordance with one of our trading programs
(currently Stratus, Discus, CFM ISD, CFM IST, CFM ISTEC, CFM ISE MN, CFM ISB, GEDB or CFM Ensemble
which operates as an allocation between Stratus and CFM ISD). The investment advisory agreements include
indemnities in favour of the Firm and CFM LLP. Clients generally retain the authority to appoint counterparties
and service providers (such as executing brokers, clearing brokers, custodians, administrators, etc.) and the
directors of such private funds may authorize the Firm to conduct cash transfers required to support the trading
activity and the day to day operations of the fund. For clients that have appointed CFM LLP as an AIFM and for
which the Firm acts as a portfolio manager as a delegate to CFM LLP, the Firm may also be party to certain
counterparty agreements of such client private funds and the Firm may have the right to authorize staff to conduct
cash transfers.
The Firm has a policy to seek to treat clients equitably. Due to tax, regulatory, ESG or other specific needs, a
client may agree, however, to exclude certain instruments or to modify the applied trading program. Such
adjustments may include exclusions of instruments from the pool and/or adjustments of the applied risk level.
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Proxy Voting. The Firm has a policy to, when it is mandated to do so, vote proxies in the best interests of its
clients. The Firm has appointed an unaffiliated external service provider (the “Proxy Agent”) to analyse proxy
voting situations, deliver recommendations and process proxy votes in accordance with the instructions of the
Firm. Except in exceptional circumstances, CFM will vote proxies in line with recommendations of the Proxy
Agent. The Firm’s proxy voting policy is available to investors upon request. An advisory client may obtain a
record of the Firm’s voting for such client, if any, by contacting our Chief Compliance Officer, Martin Tornqvist,
at compliance@cfm.fr.
Class Actions. The Firm has entered into an agreement with a service provider to process class action claims for
certain of its private fund clients that invest directly in securities. The service provider receives a performance
based fee based on the distributions received from processed class action claims.
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