Q:  What is the history of the firm? A : Rady Asset Management, LLC is an investment management firm specializing in providing sophisticated investment strategies to advisors, high net worth investors, and institutions. The firm is based in La Jolla, California and manages in excess of $250 million, in the form of publically traded mutual funds, limited partnerships as well as separately managed accounts. Our primary objective is long-term capital appreciation with a laser-like focus on risk management and downside protection. Q:  What core principles guide your investment philosophy? A : Our investment philosophy is based on the premise that protection of capital is as important as return on capital. Our contrarian value philosophy provides an inherent “natural hedge” by investing in stocks when their prices are significantly depressed and trading at or below their intrinsic value. Q:  How does your philosophy translate into an investment strategy? A : We employ a fundamental, bottom-up, research driven analysis with a focus on long-term capital preservation and risk management. The Rady Contrarian Long/Short Fund primarily invests in mid to large capitalization U.S. companies and seeks to achieve positive and consistent returns while limiting exposure to general stock market downside risk. It combines long positions in undervalued stocks and short positions in overvalued stocks to pursue excess returns in both long and short holdings. Our mutual fund seeks to invest in companies with hidden intrinsic value, according to strict valuation parameters. It is our belief that short-term market volatility presents long-term investors with a unique opportunity to take advantage of price inefficiencies. We invest in “best-of-breed,” dominant companies, with profitable, sustainable business models and strong balance sheets, that are trading at or near their 52-week lows and have exceptional management with a proven track record. Generally, we want to own companies with high quality earnings streams, void of one-time gains and charges and accounting gimmicks. One of the ways this is accomplished is by avoiding companies that have too much Goodwill and utilize a "growth via acquisition" strategy. The investment team chooses common stocks that they identify as currently undervalued in the market and find value in companies when they expect future profitability to be significantly higher than what the current stock prices reflect. Consequently, these criteria produce an asymmetric risk/reward profile, which leads to superior long-term, risk adjusted returns. As a general rule, the team avoids investing in companies with high fixed expenses, like industrial and manufacturing businesses, in addition to airlines and auto manufacturers. Our belief is that these companies typically do not have the flexibility to scale back their expense structure quickly enough during difficult times. Q:  Can you define “best-of-breed” with a few examples? A : Our definition of “best-of-breed” includes those companies that have the critical mass, balance sheet flexibility, best and brightest management teams, and other resources to be dominant in their marketplace. The fund looks for companies that are not so large that they face growth challenges and not so small that they suffer from inadequate competitive resources. We typically won't own the biggest pharmaceutical companies in the world but we do a very comprehensive deep dive into sub-sectors, such as pain management companies in the drug and biotech space, which is growing at over 20% a year. This is an example where we want to own the best of breed in the drug and biotech space or specifically in the pain management space. This allows us to own more nimble companies where we think that the economics are more attractive. To cite another example, we own a company called FLIR Systems, which is dominant in the thermal imaging and infrared systems space, with a $4 billion market cap. On the surface that may not look like a dominant best of Breed Company, but in its niche there is no other company that can compete with them. Q:  What is your research process? A : Our research process begins with the application of proprietary quantitative screens to a broad universe of stocks. We focus on mid-large capitalization securities to meet liquidity requirements. In such a way, this broad universe is narrowed down to about 300 to 400 best-of-breed companies. Next, we focus on company valuation to compile a manageable list of “best ideas” for rigorous fundamental analysis. The second phase of our research process is more of a qualitative analytical process. We focus on the quality of the company, management, industry and business model. We review annual reports of each company, valuations, analysts’ reports, and listen to conference calls. Additionally, we focus on investing in companies that we know well and we also speak directly with analysts and CFOs of companies. Once a security is selected, we use proprietary technical analysis to determine the transition from net selling to net buying. We also evaluate the stock’s trading range and valuation for a ten plus year period straight through to the current minute-to-minute price movements. This establishes the strategic price targets and long term price expectations and triggers the stock purchase process. Q:  Could you give some illustrative examples to describe your research process? A : We seek out-of-favor but quality companies across a wide range of sectors. We buy great businesses at historically low multiples, trading near 52-week lows while at the same time shorting low quality companies trading at historically high multiples and trading near their 52 week highs. Our approach also applies at a sector level, where we buy into sectors that are out of favor. We drill down into the most attractive segments of a given sector seeking to buy the best companies at the lowest price. Historically, utility stocks have traded at a premium to the market, given their stable cash flow stream, attractive dividends, and solid balance sheets. Currently, many of these stocks are down 50% to 70% and trading at 52-week lows, and decade low valuations. They are trading at 9-10X earnings, whereas in the past they traded at 15-20X earnings. In this space, we think that the nuclear assets are the most valuable. We believe this because they cost approximately a billion dollars, or more, and 10+ years to build. So, by buying these utilities that have a significant exposure to nuclear, we are able to buy irreplaceable assets, that are trading at a significant discount to their intrinsic value and replacement cost. We also like the industry's high barriers to entry, since it takes substantial time and financial commitment to develop nuclear assets. With natural gas prices rather low right now, nuclear power is being viewed by the markets as less attractive. A few of the utility stocks that we own are NRG Energy, Inc., FPL Group, Inc., and Exelon Corporation, largely because of their dominant market positions, nuclear exposure and the fact that they're trading at decade low valuations. Another similar example would be the natural gas focused exploration and production companies. Natural gas is trading at historical lows and many of these natural gas focused stocks are down 80%, which gives us the opportunity to buy them at a significant discount to their intrinsic value and replacement cost. Our belief is that natural gas prices may remain depressed for a while, due to oversupply, but with many of the stocks down 80% from their highs, we think investors in these companies are being more than adequately compensated for the risk. We also own video gaming stocks like Electronic Arts, Activision Blizzard, Inc., GameStop Corporation, and Nintendo Co., Ltd., which too are trading at decade low valuations. Video gaming stocks tend to be a little more speculative but we believe an attractive risk/reward ratio exists, given that many of the stocks are down more than 50% from their highs. Stock exchanges are another cheap sector. We own the NASDAQ OMX Group, ticker NDAQ, whose stock is down from $50 to under $20 when we bought it. We also own Knight Capital Group, ticker NITE. Both are trading at historical low valuations. Q:  What kind of diversification do you maintain and what is the fund’s benchmark? A : We seek to generate alpha through extensive bottom-up research and individual stock selection rather than attempting to predict market trends or direction. This is a strategy that adds a layer of diversification to the fund's portfolio. Furthermore, since stocks that we are short tend to be less correlated to the broader market. They can help lower the volatility of a portfolio and protect the portfolio against market declines. Historically, we have 80% to 90% of fund’s asset in stocks we like, 10% to 20% in cash and with 20% to 30% of the assets in the stocks we are short. The S&P 500 Index serves as the fund’s benchmark index. From a diversification perspective, we do not try to adjust sector weights in the fund based on the S&P index, but we limit individual sector allocation to approximately 20%.