Q:  What is the history of the company and the fund? A : Alternative investing has evolved over the last 20 years. Our firm was early in the evolution and we date back to 1995. Our two founders were investing in alternatives prior to that and were early in creating hedge fund portfolios back in the nineties, bringing them to sophisticated families and institutions investors. People have recognized that alternatives are an important part of portfolios, not only for endowments and foundations and institutions, but also for the larger investor universe. Our focus is liquid hedge fund strategies. We invest in various strategies from emerging market global macro to activism, to arbitrage, to relative value type strategies, as well as traditional long short equity and credit. We do not invest in private equity or direct real estate, or oil and gas - we are solely focused on hedge fund strategies. Even within hedge funds we are focused on the strategies that are less dependent on market direction or having beta as a large component of the driver of returns. We are more focused on the situations that are more opportunistic, idiosyncratic, or arbitrage in nature, where you can really have more of a differentiated driver of return. It is important for investors in alternatives to be able to differentiate between labels of what is an alternative and understand what a true hedge fund strategy is. The proliferation of strategies that are labeled “alternatives”, especially those that meet the Investment Company Act of 1940, has been tremendous and it is difficult for investors to separate noise and what is real. Collins Capital originated as a family office and the Collins family is still one of the largest investors, which is very important. The focus of what we do is building high quality portfolios. That was our driver. When we moved into the 40 Act world our mantra was, “if we cannot get the same quality of managers and the same purity of style in the execution of those strategies, then it is not going to be a good fit for us.” We have found you can do a lot with the 40 Act if you put the proper structure in place to allow the managers to execute those strategies in the most similar way possible to what they are doing in the private fund context. That differentiation resonates with investors as the understanding of different strategies and approaches has increased recently. Alignment of interest is also something that resonates with investors. Our founders are the largest investors in our fund. We are accustomed to having our money invested alongside our investors and we expect it from the managers we invest in. However, in the mutual fund world, we have found that alignment of interest is much less common. The 40 Act fund has about $80 million and we manage around approximately $400 million at the firm level. Q:  What is your investment philosophy? A : We are not market neutral, but we are focusing on strategies that we think can create opportunities that are not dependent on getting the market directional call correct. For example, we have an activist strategy. Activism is inherently a directional strategy. It is more volatile. However, the driver of the returns is not capturing beta or trying to guess when the market is going to go up, but rather finding the one-off situations where the manager can be part of the change that drives a share price higher. By finding the type of catalysts within their control, it is a great risk adjusted way to get exposure to certain markets. Another example is emerging market global macro, which we think is a great risk adjusted way to participate in those markets. We do not have any emerging market equity managers, we do not have any emerging market credit managers - not because we do not think there are good managers in those spaces, it is just that we think the better risk adjusted approach is to go into emerging markets via a macro strategy. The reason for that is macro managers have a much broader toolkit at their disposal. They can express trades via interest rates or via currencies, or futures, et cetera, and it allows them to put on a much better risk adjusted trade as opposed to trying to guess if the market will go up or not. We do have a top down view and we will express that by moving around different exposures, but when we blend all the strategies together and make sure the managers and the instruments and strategies complement each other well, that overall blended profile tends to be one with very little directionality. The macro view is a very important part of what drives our portfolio. The way we use that directs how we want to be focused on finding managers and opportunity sets. For example, one of our more recent view is that event driven opportunities in the equity markets, including activism, will be a fertile environment for our opportunity set going forward. The reason for that is when you look at the cash on companies’ balance sheets, when you look at the increased M&A environment, wide open credit markets, and probably most importantly an increased receptivity by companies’ boards to constructive dialogue from investors and different ways to unlock shareholder value; when you put all of those components together it is a very favorable backdrop for event driven and activist type strategies. Doing alternatives in a multi-manager format in the 40 Act is a big advantage, as opposed to doing a single strategy approach, because you get to blend all these different strategies together into one portfolio for 40 Act compliance and regulation purposes. That blended portfolio is how everything is monitored and measured. You can have strategies executed in a purer style than they could be in a stand-alone context. One example is activism, which inherently is a more concentrated strategy. If that were to be launched on a stand-alone basis, it could trip the diversification test under the 40 Act; however when you blend the portfolio with all of our other portfolios in the fund, the biggest position is going to be only a couple of percent in the overall fund. Q:  What is your investment process? A : Our process is a combination of top-down and bottom-up review. The investment team has a semi-annual portfolio review in which we meet for three days. We go into detail of our top-down views and where we are seeing the opportunity set, what we think the macro, political, and economic landscape will look like, and how we want to be positioned to respond to that over the next several months. As part of that meeting we also do a deep dive on each and every manager and all the managers who are in our pipeline. That is the bottom up part of the analysis. We want to know where they are seeing the individual opportunities, what has been driving their performance, what is a headwind, what is a tailwind for that manager and that strategy. The output of that meeting gives a deeper articulation and understanding of how we want to be positioned, but also what our target allocation range is for each manager. That is our guide for the next several months as we allocate capital to managers. On a monthly basis, we have a monitoring meeting where we go into detail on each manager’s drivers of performance, opportunity set, market performance, et cetera. Then we have a separate meeting where we discuss new managers we are looking at. We then have a third meeting where we make allocation decisions and rebalance each month. We are not a hierarchical organization. We all participate in the meetings, we all read the communications from the managers. We are all sending out real time updates when we see different events in the market that could be impactful to a manager or opportunity set. We will move capital around and we try to be opportunistic and forward-looking. We are not hot money, we do not try to time going in and out of managers, but we are cognizant, especially in the current environment of artificial injections of liquidity, that opportunity sets can come and go with increased frequency. Markets are more volatile in a lot of ways than they have been. In the current environment you have to be very keen and aware of the macro risks and political risks. We are fortunate that our founder, Dorothy Weaver, has an enhanced background in that arena. She chaired the Federal Reserve in Miami for a period of time and that is a helpful insight as we formulate views. In the mutual fund, we currently have seven strategies. We are always looking to add different managers. The process to add or delete a manager is the same as on the private side of the business. It is the same team and the same investment process. The last piece of the analysis is whether the strategy fits, whether the structure fits for the mutual fund or not. When we are looking at taking out a manager specifically, over the history of our firm we have averaged around a 15% turnover in managers. The drivers of the turnover will vary from opportunity set to performance to capacity constraints, but for whatever reason it has averaged that number consistently. However, we are always looking for any type of red flags and any type of organizational issues, any disagreement with the key personnel, their personnel turnover. We are very cognizant that certain strategies will be more capacity-constrained or can have strategies that their returns are degrading as they grow. Q:  What strategies are you exposed to? A : What is nice with the mutual fund is that there is a whole other degree of transparency and control over it. It is a managed account structure and you have control over all of the positions. You can stay on top of that in a much quicker manner. One of the big differences between our fund and some of the other funds out there is that we tend to have less exposure to traditional long short equity strategies that tend to be long-biased. We have more exposure to strategies such as global macro, arbitrage, long-short credit, or activism, which do not have the directionality component to what they are doing. They are focused more on niche markets and more differentiated markets. The seven strategies we have are arbitrage, market neutral, long-short credit, activism, global macro, reinsurance, and an opportunistic bucket that can move around different shorter-term opportunity sets. Another difference is we do not have any CTAs. We do not have anything against them, but they tend to be less of a diversifier for our portfolio because we have more differentiated type strategies that can kick in, in a better risk adjusted way in the choppier times than a traditional CTA type strategy can. The reinsurance strategy invests in catastrophe bonds and insurance-linked securities. It is one of the truly non-correlated strategies out there. The main driver of gains and losses in that strategy are really weather and catastrophe related events, which tend to have very little correlation to broader financial markets. We like it as a diversifier and it is a strategy we have had a lot of experience with over the years in our private funds. It is also considered to be in a hard market, where the pricing of new policies continues to generate healthy yields. It is also a good fixed income alternative. We always look at return and volatility expectation in the context of what the strategy is and in the context of what the environment for that strategy is. If you are in an environment with 20% equity returns then it is going to be a different return expectation for some equity related strategies than an environment where you are expecting negative returns for several years. Our focus is on finding the best risk-adjusted returns that we can find for the given strategy and for the given approach that the manager takes within that strategy. That is why we can have the manager execute as closely as possible the same strategy within our mutual fund as they do in their private fund, as opposed to other cases in which you look at their top headline descriptor of what they are doing and may think they are doing the same thing in the 40 Act, but when you drill down into how they express that strategy and its individual positioning, their management from a turnover standpoint, their management from gross and net, use of options, or other derivatives, et cetera, you can see a very different type of return and volatility profile. We are fortunate that our risk manager has an engineering and computer programing background as well as a business background so he has the ability to create a lot of proprietary tools that allow us to measure correlations in various ways and to measure market factor analysis in various ways so we can tease out what are the hidden drivers in the manager’s returns, what could put them into a more challenging environment, and really try to use those tools to inform our qualitative due diligence process and decision making. Q:  What is your research process and how do you evaluate managers? A : In addition to the in-depth qualitative and quantitative diligence we conduct on the manger, the strategy, the risk management, team, etc. we are very focused on an extensive suite of operational diligence as well. We visit every manager we are invested in at least once, if not several times, prior to investing, in addition to several conference calls with our whole investment team and several members of their investment and operational teams. We do third party background checks that uncover everything under the sun about a manager. We update those each year. We also talk to all the service providers, the custodians, and the administrator. We do several reference checks to really get an understanding of the team. We do detailed analysis of their compliance procedures, what their trade settlement process is, et cetera. We are doing reconciliation of the balances between the prime brokers, the custodian, the administrator, and get a good understanding of how the account balances tie out. We try to talk to the auditors, the attorney, et cetera, to really understand how a firm handles operations, how they handle compliance, and only by going through that process can you really see if it is a culture of compliance. Are they taking unnecessary risk? Have they made an investment into that aspect of the business? What we do not do is to say that we like the manager, we like the strategy, now we will start operational diligence. We think it is something that has to be moving alongside the analysis of the opportunity set because it does take some time. Q:  What is your portfolio construction process? A : The limits on managers vary by strategy. Inherently the lower volatility, lower risk strategies could be a little bit larger if they are in a good environment. Allocation ranges vary depending on strategy and the opportunity set. Those ranges can move around because you want to make sure that certain strategies are not overlapping, or for whatever reason the environment is not collapsing to where a couple of strategies are going to have the same drivers of their opportunity set. You need to be cognizant of how everything is performing in the context of one another, which goes back to the risk management aspect and understanding how the mangers are positioned, what the exposures are, and how they complement each other. In our managed accounts, we have full transparency so there is a much greater level of granularity that we can go into. We touch hundreds of managers a year and we screen down to a couple dozen a year that we really spend a lot of time looking at. From there we are adding a handful of managers across our different funds. To launch a hedge fund in today’s environment you have to be pretty good. The quality of managers out there is good. We like working with managers when they are young and getting to know them even before they launch. We look at how they are building a business and how we can be helpful in that. That type of access can inform you of how a person thinks, of not only running money but also building a business. Making sure they have the proper infrastructure and team in place is extremely important. Q:  How do you define and manage risk? A : Our approach is that it is not just equity risk, or interest rate risk, or credit risk. It is a multi-faceted risk analysis, because you are investing in strategies in which the drivers of the opportunity set, or the biggest risk in their opportunity set, can be things that you would never be aware of when you are just looking at the headline markets. For example, if you are in a mortgage arbitrage type strategy, political risk is extremely important. Pre-payment risk and risk to changes in the way mortgage servicers advance payments through their system is also important. Volatility metrics for macro strategies, volatility in the interest rate markets and the currency markets, are examples of drivers of the risk in those strategies and they take a lot more work to keep on top of and really understand. For macro strategy, for example, is it a change in interest rates, is it an absolute level of interest rates, is it the magnitude of change of interest rates, or is it a curve change? All those examples can have a different impact on a different strategy. We try to look at all of the different inputs and understand how they are evolving. When we look at market performance and volatility, our risk manager generates charts on a weekly basis for the entire team that covers several dozen markets and risk measures. We want to understand some of the more nuanced markets and keep on those because often when you are focused on some of the niche strategies it is those risks that can catch you. Hedge funds in general and the industry can probably do a better job of educating investors to teach them what the drivers of opportunity sets are and what a good environment is and what is not. There are still perceptions from some investors that hedge funds do something different than what they really do. In our opinion hedge funds are supposed to be hedging, they are supposed to be opportunistic, and they are supposed to be focused on risk management. That is what we look for in managers. The psychological aspect of what we do is very important. Understanding how managers as human beings respond to different environments, what drives them and what really throws them off course? That is something you cannot put into a risk analysis or optimizer. That is qualitative judgment that is cultivated over several decades of experience in this industry.