Q:  What is the history of the company and the fund? A : My partner, Eric Crittenden, and I founded Longboard in 2003. We had been working together prior to that for a few years at a multi-strategy hedge fund that did external manager allocation, venture capital, and investment management work under one umbrella. Together, we built the global macro hedge fund and managed futures, commodity trading advisor allocation strategy. After building that platform we wanted to spin out into our firm and continue what we had been doing. We were also at the beginning stages of our own proprietary strategies and the initial stages of building what later became Longboard. In 2003 we met Tom Basso, who has been profiled in Market Wizards, a well known managed futures, global macro hedge fund manager with a long, successful career. When he retired in 2003 we presented him with a business plan that said we needed seed capital to start and he helped us to get started. Longboard, initially named as Blackstar Funds, did two things; it invested in other managed futures and global macro hedge funds and in parallel developed our internal proprietary strategies. Our investment strategies evolved to a platform where we invest in all global markets; from currencies to commodities, equities and fixed income securities. If it trades in the world we are collecting the price and volume data and feeding that information into our investment strategies. Q:  What is your investment philosophy? A : We are a trend follower and we are seeking to capture directional, long-term, persistent price trends both on the long side, as well as the short side, in all global markets that included corporate and sovereign fixed income markets, commodity markets, global stock market indexes, and global currency cross rates. It is a broad mandate but to that opportunity set we apply one specific discipline, which is a trend-following strategy. We are not always in all markets all the time. What we are looking for are directional price trends to the up or to the downside. We basically buy breakouts and sell breakdowns over a range and hold on to the winning positions that continue to go on and persist in price direction in that movement, and fold the positions that revert back and give false positive signals. This creates a positive return stream over time. We reduce down our focus onto the distribution of prices. In the end prices are going to be the final arbiter of success or failure. The one trend that I can pinpoint is that marketplaces and economies are in a constant state of evolution. Certain economies grow, certain economies die. The new market leaders emerge with disruptive technologies displacing market leaders of today. The one trend that you can always bet on to be persistent as you go forward in time is that you will constantly see an evolving process that will manifest winners and losers. To take the philosophical and empirical bet that our expectation on a go-forward basis is that you are going to see the same type of evolutionary distribution of success that you have had in the past. Not that I can predict the specific markets or when that is going to happen. But every big winner and every big loser has one unique common characteristic, which is while European or developed nations were going up and taking over, over the last 500 years relative to China and India, those economies were making highs and economies were expanding and that showed up in the price uptrend. On the flipside, economies that were shrinking were showing up as shrinking. All of that evolutionary distribution manifests itself and shows up as data streams in prices. That is what we end up focusing on. Q:  What is your investment strategy and process? A : A few weeks ago we took a short position in gold and silver. At the low end of that one-year channel we got a signal to be short and now you are seeing more recently the short-term downside volatility in gold and silver. It is not that I predicted that gold and silver were going to blow up or I had some sort of fundamental bet, it was just simply that the math works out that if you’re going to capture directional movement in markets, if you have a strategy that forces you to get in long and short as those things start to break out to the upside and downside, it’s mathematically not possible for you to not capture the future trend that ends up playing itself out in those markets, as long as you follow the rules. The duration of the trend doesn’t matter as long as it persists, but having this longer-term timeframe leads to longer duration hold times. The trends that we are trying to capture are longer-term persistent trends. Our average hold-time on a position that is profitable is 18 months or longer. What we have seen over the last year is that trend has lost its momentum. Those things have come back into the average range over the last year and that trade has been taken off and removed from being active in our portfolio. A year ago we were heavily long fixed income market and today we have no exposure in fixed income. It has been replaced with the breakout to the upside in global equity indexes. For the most part we are pretty much long every global equity index around the world. Those positions started to come in all through the second half of last year, aggressively in the fourth quarter. We have seen that trade work out so far and if the equity bull market globally is intact and we continue to see new market highs and the global equity, global asset inflation theme continues to play out, that’s going to do well for our positions. Then we just hold onto those positions as long as they continue to make new highs, or continue to be above average performers. The decision to get out, or when we know that the trend has ended, for us is as easy as saying when it is just average over the last year. So if the price is equal to the average price over the last year, to us we are saying you’re no longer an above average participant. We have a discipline that says we only want to hold above average positions inside of our portfolio and hold on to them as long as they continue to have that price persistence above average performance. Our strategy is not predicting trends. What we are saying is that after the fact, when you look at the price chart, it is easy to see the trend of something that went from 100 to 1,000. The price-trend is obvious but it wasn’t obvious at the time that you were putting the trade on, but obvious after the fact. But what is obvious, from a mathematical standpoint, is that every breakout in every trend started with that initial breakout to the upside to new highs or new lows. Let’s say we make money on half of our positions and we lose money on the other half. That’s really the distribution of what we do. We don’t really have a great predictive edge from an entry, exit signal. It’s really no more successful than a random flip of a coin if you just looked at the probability of buying this breakout and having that go on to be a persistent price trend, it is really no greater than the probability of it reverting back to the average and losing money on the trade. It’s not the win-loss ratio that matters, people get very hung up on a strategy that has 90% winners, but winning percentages are overrated. What actually matters is the asymmetry between the magnitudes of your successful investments versus the magnitude of your losers. For us, by backing out your perspective to this much longer timescale, we are incredibly insensitive to short term volatility. Short-term reversals in markets are just an expectation. One of the facts of how we go about investing is that we are willing and perfectly accepting of some short-term volatility. We believe that you have to accept some short-term volatility in order to have long-term success. It’s not realistic to think that you can just have great long-term compounded results but also do that on incredibly low volatility. If you could do both of those things you would automatically start compounding in no short order and have all the money in the world. Q:  What is your research process and how do you look for opportunities? A : We tend to have a philosophic bet that is also proven by the empirical evidence. When I research all the different types of trend following strategies and look back periods, the most robust and most effective strategy is to skew further out into the longer term timeframes. What we are doing specifically is looking at about a year to 15 months of data. For simplicity, we have a one-year look back that is a rolling channel of prices. If we get a new closing price in a market today, the previous year price drops off so that we’re always rolling forward in time with this one-year look back channel. If that market is at a new high over that one-year channel, or it’s at a new low, we are going to have a position long or short. The way that we exit that market is that if you are just average, so the price is at the median price over that one year period of time, we are going to exit that position and have no exposure there. The elegance of this approach is such that there is no way that you will ever miss a long duration persistent directional macro price trend if you buy new highs or you sell new lows, because the rule forces you to get positioned inside of all future breakouts. Every huge big price trend started with that initial new high breakout or new low breakout. Q:  What is your portfolio construction process? A : The assets under management are just shy of $50 million as a firm. There are $31 million of those assets in the fund, which is only four months old. Four months ago the fund was at zero. The portfolio universe of our opportunity set is about 130 different unique marketplaces across four asset classes; currencies, commodities, equities, and interest rates. On average we tend to be engaged with active long short signals in about 60% of those markets. What we like to see is a portfolio that has signals coming from different independent positions. I don’t want to see a portfolio where the only signal we have is long global equities and we have nothing else. One of the big things is that this strategy that we’re talking about is a well-known strategy in the institutional investment community. So managed futures have about $300 billion of assets allocated to it and hedge fund managers drive it all. So this is a hedge fund strategy that has assets from hedge fund investors, institutions, endowment funds, sovereign wealth funds and other institutions. It has huge diversifying benefits because we do well during times of crisis. When the market in 2007 to 2008 and 2000 to 2002 were blowing up; those things that are hurting equities are creating massive global directional price trends in markets, which become significant harvestable opportunity for our trend-following strategy. We are talking about something that over time can generate a compound annual growth rate that is 800 basis points in excess of the risk free rate of return. It becomes an attractive long-term compounding opportunity. What we do is actually a staple and a core holding in most institutional portfolios. What is different about Longboard and our fund is that we recognize that the world and financial advisors have insufficient diversification tools to build high quality portfolios for clients. What Longboard is doing, and what we see as the void that we are filling, is not trying to take our strategy to existing hedge fund investors who already have access to that toolbox, what we’re doing is packaging this high-quality talent and strategy and putting it inside of a mutual fund structure that allows financial advisors to have access to that tool in their toolbox so that they can build superior diversified portfolios for their clients. We benchmark ourselves against the seven largest trend-following managed futures hedge funds in the world. Longboard is a financial advisor in the mutual fund structure, which is a completely ignored and under-served marketplace. We are advancing the access to financial advisors to get better tools to build better portfolios for their clients. The trading return plus the interest income aspect of it leads to your total return. That total return for me over time is 800 basis net of fees plus the risk free rate. So if it were a zero interest rate environment that I expect for the next decade, then I would expect that we would be able to produce a compound annual growth rate somewhere around 8%. If rates normalize and they go to 2% then I would expect compounded annual growth rate to skew higher because we are going to get more collateral yield. There’s no active part above collecting collateral yield, you just make the short-term interest rate just for showing up at the party to begin with. Then you get to use that collateral for your trading positions over time. You get absolute rates of return that are highly attractive over time. You get correlation benefits relative to equities, where this strategy approach has a beta of zero to the stock market. It has a beta of zero to other types of asset classes. During moments of crisis, the big dislocation cycles where you tend to see large directional movement that manifest themselves as price trends, we tend to see a fairly significant negative correlation. A lot of people look at the stock to see how they can hedge the downside or get out when it goes down and we don’t think of the world that way. We think of just being completely flexible. Markets going down or markets going up, there is opportunity of both sides of that position. You don’t have to just hide from markets and try to become a turtle. A flexible strategy like ours has the ability to actually turn those environments that everybody is trying to hide from into moments of opportunity to produce positive absolute returns. Q:  What kind of risks do you focus on and how do you manage them? A : From a risk allocation standpoint, how we end up position sizing each one of these trades is that we start with defining what our risk budget is. So if we are fully diversified, the signals that we are giving have good diversification, good independence, let’s deploy the full risk budget. We take that budget and then we want to break up the budget and deploy it equally across every position in the portfolio. If I was willing to take 20% risk and I had 20 positions I would have 1% risk per trade. It’s an ongoing process of taking the risk budget that we have, breaking it up equally across whatever signals we have in the portfolio and then managing the fact that it’s a dynamic process. You have 40 trades on today but you might get 20 more signals over the next three months as markets evolve and change. You then need to make tactical adjustments to your positions sizes. You need to reduce some positions in order to free up the room to bring in the new positions without deviating from what your risk budget is. The vast majority of everything that we are doing in terms of active trading, or active reallocations, has to do with the fact that we have a strategy that is flexible to deal with the ongoing evolutionary process of global financial markets. We also have to say that no matter what the market is doing we cannot control where the signals come from, we can’t control where the breakouts happen. What we can control is how much of our capital are we exposing to risk to whatever trends are occurring in global markets right now. We know the exact amount of money that we will lose on any trade that goes against us at all times. I can tell you right now if every trend in our portfolio were reversed at the same time, I could tell you exactly how much money we would lose if that event were to happen. It is imbedded in our risk management culture. The entry, exit, while it is important to create that asymmetry and have the winners bigger than the losers, and have an investment strategy that is sustainable and works over time, the most important part is to marry that positive edge with a very disciplined risk allocation framework that allows you to take that positive edge and turn that into compounded returns over time. There are markets that we will allow to reverse very largely against us, however we control the volatility of positions that we are willing to give more room because the average price over the last year just maybe far away from the current market price. We control our risk and therefore the amount of volatility that position is going to impact on the portfolio by adjusting our position sizing. There is an inverse relationship between the distance between the current market price we are going to get out and what our position size is. The greater the room we have to give a trade, the lower exposure we’re going to have in that trade, relative to something else that maybe has a closer exit point, that will have a higher position size on it. If they were both to go against us we would lose the same amount of money in each one of those positions. The level of diversification in the portfolio then dictates and drives what our risk appetite is in the fund. If we have a minimum and a maximum risk zoned, we want to have our full risk budget deployed in a portfolio that has a lot of independent diversification. We have the minimum risk appetite deployed in a portfolio that is heavily concentrated in a correlated sector. That generally never happens but it is possible so we have a risk regulation that goes on internally within the portfolio.