Q:  What is the history of Presidio Capital Investments? A : Presidio Capital Investments, LLC is a SEC Registered Investment Advisor based in San Mateo, California. The firm was founded in 2006 and started by managing separately managed accounts. In 2009, PCI launched its first hedge fund before introducing its first mutual fund on July 7, 2010. Q:  How has the Presidio Multi-Strategy Fund evolved? A : Our view is that most traditional portfolios are not really as diversified as investors may think, and a bulk of risk that is embedded in these portfolios is tied to the equity markets. The success or the failure of these portfolios hinges upon what happens in the equity market. We had been thinking of different ways to try anddiversify client portfolios even further and de-risk them from the equity market, and what we suggested is that clients and advisors de-risk from the long term equity risk premium and diversify into other risk premiums in the market. Our belief was that hedge funds provided some reasonable diversification benefits, especially when compared to the S&P 500 index. However, the problems we had seen with hedge funds was around liquidity and transparency, which have made hedge funds less attractive to investors. Based on this, we felt that we could definitely get into the mutual fund business by creating an option that provides hedge fund-like benefits (low correlation to equities) but within a liquid vehicle. Q:  What is your investment strategy? A : We like to refer to our strategy as a multi-asset and multi-strategy portfolio. The idea is to create a lowly correlated differentiated source of return that clients and advisors can use to further diversify their portfolios. Multi-assets means that we have a high degree of freedom in what and where we can invest. We can invest up and down the capital structure, in equities, credit, duration, interest rates, commodities, currencies and pretty much the whole investment landscape with the exception of illiquid investments. In addition to multi-asset, we also employ a multi-strategy approach, which is a key component to the overall strategy itself. We are multi-strategy in the sense that we can utilize various tools available to us such as shorting, options, derivatives and leverage to better manage the risk and return profile of the portfolio. Q:  How do you build your portfolio? A : We first try to create a very balanced portfolio where that is meaningfully exposed to a diversified set of risks, whereby each risk makes a significant contribution to the portfolio’s overall risk. We also tactically shift our portfolio to certain risk factors that express our views (e.g. if we are bullish on credit risk, we may increase our risk budget to credit related exposures). We also have an explicit layer in our portfolio called “safety portfolio,” which is a diversified set of “insurance” instruments that are expected to payoff during periods of severe market stress. We view that piece of the portfolio as critical for our efforts in addressing systemic risk. Under normal conditions, we believe a risk balanced portfolio should do extremely well, and under those periods of systemic crisis, our safety layer is expected to kick in and preserve a substantial amount of capital that we can later deploy into cheaper, more attractive assets. Q:  Can you expand further on your multi-allocation strategy? A : As far as allocating the risk premiums is concerned, we focus on the five key risks out in the market, namely equity risk, credit risk, interest rate risk, commodities risk, and currencies risk. In addition, we have a sixth risk premium called alpha or exotic risk premium. When we allocate to these risk premiums, valuation becomes a very important part of our decision in how much to allocate to a particular risk premium. Valuation is essential in how we do things. When things become attractive in terms of valuation, we start building positions and when things become unattractive on a valuation basis, we start trimming positions. For example, when interest rates are as low as they are now, we do not think that the compensation is worth the risk (e.g. we are earning a negative real yield). As a result, we would substantially reduce that risk allocation within the portfolio. Presently, credit is a lot more attractive than it was previously on a relative basis, so we have increased the amount of risk to credit and have slowly been increasing the risk to equities as well. We are very cautious in terms of how much we allocate to equities because that further increases the already existing equity exposure in client portfolios. We also apply a modest amount of leverage to a number of low volatility strategies (such as hedged credit, etc.). Leverage sometimes can be seen as “taboo,” but the reality is, when modestly and prudently applied, leverage can create much more diversified and stable portfolios than unlevered portfolios. The total amount of leverage that we target for our portfolio is about two times so that we are able to still get a reasonable amount of return while creating a highly diversified the portfolio. Q:  What risks do you monitor and how do you contain them? A : There are a multitude of risks out there in the market. As we mentioned, equity risk, credit risk, interest rate risk, commodities risk, and currencies risk contribute to the majority of risks in most portfolios. The first part of the risk management process begins with measuring the risks in the portfolio. Once we can quantify our risk exposures, then we take steps in determining what risks are worth keeping (increasing) and what risks we would like to reduce. Right now, for example, the risk that we don’t want to take on (or much of) is interest rate or duration risk (given how expensive interest rate securities are at the moment). One risk that we think we are being reasonably compensated for is credit risk, whether on the investment grade side or the non-investment grade side. Credit spreads right now are very attractive, not only on a relative basis but also on an absolute basis, as current high yield spreads are between 800 to 900 basis points and investment grade credit spreads about 200 plus basis points. Historically, the spreads have been much lower on average, so at this time we think the rewards are commensurate with the risks. The bottom line is that we take on (or increase) risks that we think we are being fairly compensated for, and reduce those with unfair compensation. Q:  Is a macroeconomic view important to you? A : A macro perspective is very important for us. In addition to valuation, the macro environment helps to indicate the types of exposures we should evaluate and plays a part in terms of how we manage and allocate the risks in the portfolio.