1. Analyze the U.S. stock market macro outlook
Our investment process starts with a look at the macroeconomic outlook for the stock
market as a whole. There are several factors involved, with the most important being the
liquidity cycle and it’s impact on financial markets. In the context of the liquidity cycle,
we examine the more important economic variables and readings that determine not only
the fundamental strength of the overall economy, but ultimately dictate Federal Reserve
Bank monetary policy. On a monthly basis, we examine labor market conditions,
industrial production, cost pressures as measured by the PPI, CPI and the commodity
components, and capacity utilization. The reason we view the liquidity cycle as the most
important factor is that it leads economic growth and also has a very large impact on the
valuations investors will place on equities.
There are several other macro factors we consider. The technical condition of the
markets is actively monitored. We are interested in whether the stock market is in an uptrend
or downtrend, how broadly based the buying or selling pressure is, whether
sentiment is at extreme levels, and where money flows are moving. We also look at the
rate of insider buying and selling, as they are most knowledgeable about their business
prospects and their actions convey their sentiment regarding their stock prices.

2. Sector Strategy & Leadership
We monitor the weekly rankings of sector leadership and actively analyze the technical
trend of 25+ sectors every week. This was part of the market strategy at Raymond James
& Associates, and is an invaluable tool to identify stock market leadership and strength.
As a particular sector begins to emerge and starts to show relative strength, it will provide
the partnership with several investment ideas. When our fundamental and sector work
align, we implement larger positions due to increased investment confidence and
improved odds of investment success.

3. Strategic & Technical backdrop
As the investment process is dynamic and characterized by frequent change, the strategic
and technical backdrop is evaluated to maximize the risk/reward equation. As an
example, in the latter stages of bull and bear markets investors tend to overshoot
fundamental values, which leads to large price swings. The first quarter of 2000, was a
prime example as investors chased performance, pushing tech stocks to fundamentally
absurd levels. Many stocks would rally 10-20% on any given day, as the buying pressure
was overwhelming. During these periods the Fund will tend to pull back and become
more cautious as the risk / reward profile dramatically decreases.
We evaluate the general trend of the market. We look for oversold or overbought
conditions. The quality of a bull market rally is evaluated to make sure that the market
participation is sufficiently broad and well balanced to justify further gains. Divergences
are noted as these are often the first signs that equity markets may be in the process of
changing course.

4. Investment Themes
Market themes are essentially working assumptions that investors make regarding some
group of stocks. This could be as simple and long term as the demographic impact of
aging baby boomers to the medical device stocks or as short term and fleeting as the
onset of a cooler than normal winter and its impact on energy stocks. Fashion trends can
impact retailing stocks and leave last years’ winner looking out of touch with the everevolving
tastes of consumers. Another example is the heightened security outlook and
demand for more national defense spending.
Regardless of the reason, investment themes can have an impact on entire sectors of the
economy and must be taken into consideration. Being early on an investment theme can
lead to several profitable investment ideas.

5. Stock Selection – Fundamental, Technical, Quantitative, Insider Buying
Idea generation is a top priority for the Fund and is the lifeblood of the investment
process. Finding attractive candidates for investment not only provides the Fund with its
individual stocks, it also provides a pipeline of future opportunities and provides the true
driver of investment value for our investors. We find our ideas using four primary
methods: 1) fundamental research, 2) technical research, 3) quantitative screens and 4)
insider buying. On the fundamental side, we are looking for companies delivering top
and bottom line growth, have attractive operating margins, carry little debt and have a
history of working for the shareholder. For example, a company that has true earnings
and revenues surprises provides a solid indication that demand has suddenly picked up
and that further analysis may result in an investment opportunity.
On the technical side, we go through over 1,000 stocks charts each week seeking to
identify attractive technical situations where a stock may suddenly be emerging and
under accumulation by investment funds. These potentially attractive stocks will warrant
more fundamental research. Our technical tools also provide the Fund with an early
warning signal of a stock losing relative strength and leadership.
Quantitative analysis is the least important for the Fund, but it still plays a part in
uncovering interesting stock ideas. We run a series of screens each week, to help us
identify leadership stocks, earnings surprises, and positive momentum for long
candidates. On the short side, we screen for decelerating earnings growth combined with
high valuations. Stocks identified in this manner on both the long and short side are then
evaluated on both a fundamental and technical basis before they are considered for the
Fund.  Insider buying is important as it demonstrates conviction on the part of a company’s
management in a rising stock price. We search for senior management (CEO, CFO) or
insiders with key fundamental knowledge (V.P. of Sales, Product Development) who
materially increase their ownership position. We then perform fundamental work to
determine what the potential catalyst will be. These ideas tend to be more value oriented
and held for a longer period of time.

6. Fundamental Research
Once we have identified a potential stock for investment consideration, we evaluate the
candidate to find a catalyst that would cause other investors to become interested and
drive the stock price higher. For a technology stock this could be the beginning of a new
product cycle that will see earnings growth accelerate, margins expand and result in a
company taking share from its competitors. For a natural gas stock, it could be a
probable new gas discovery or higher than consensus commodity prices. Once we have
identified the potential catalyst and have grown comfortable with its potential to succeed,
we check several fundamental criteria. We determine whether the company is favorably
valued or whether the market has already discounted the catalyst event. It is the
opportunity of an identifiable catalyst combined with a reasonable valuation that leads to
investment success.

7. Portfolio Construction
Once we have the investment pieces in place, we need to put them in the context of an
investment portfolio. Successful money management, position sizing and risk controls
are as important as security selection. It is our belief that discipline and money
management are the glue that holds a portfolio of individual stocks together. Our macro
economic outlook typically drives our overall exposure level and slant, but we keep
certain risk control parameters in place. Sector exposure is limited to 25% so that our
ideas are not too closely correlated. This helps ensure that the portfolio stays reasonably
well diversified. Individual positions limits are put in place to ensure that no one idea
can hurt the portfolio too much. Generally, an investment into a long idea will not
exceed 5% of the Fund, and we cap our exposure to 10% in any one long idea. A short
will not exceed 5% of the Fund, although 2-4% is a more normal exposure level. We use
very little leverage, as this can also increase risk beyond acceptable levels. Net exposure
has ranged from 30% net short to over 80% net long since inception. We constantly
evaluate the Fund in a portfolio context and monitor our exposure to adverse events.

8. Risk Overlay
This is an extension of 7 above. We cannot eliminate risks completely nor do we try.
The goal of risk control is to dampen risk and dramatically reduce the Funds’ volatility.
Since inception the Funds have had minimal draw downs, a beta versus the S&P of lessthan .29 and an annual standard deviation of 12%. This shows that the Fund is taking on
significantly less risk and volatility than the equity markets as a whole. We do this with a
variety of tools. Position size and sector exposure limits help dampen risk to unexpected
events. We also employ mental stop loss points to cap downside in individual stocks.
For shorter-term ideas we use a 5% stop to cut our losses. For intermediate term
investment ideas we begin to reduce exposure at a 10% draw down and reevaluate a
security at that point. If Fundamentals have changed or our conviction on the idea has
been reduced, we will eliminate the position. The goal is to keep losses small so that they
have minimal impact on the total portfolio.

9. Buying or Shorting Stocks
After identifying an attractive opportunity and determining that it fits into the portfolio,
we will generally fill a position within a few days and often will buy a full position in one
day. Other times we will scale into a position and await further confirmation from either
a fundamental improvement or a technical confirmation before filling out a position. We
utilize sell-side trading desks as well as electronic trading platforms to purchase
securities. Since 90% of our stocks are middle and large capitalization companies with
ample liquidity, market impact is generally not an issue.

10. Ongoing Evaluation & Monitoring
With change being the only constant in the investment world, ongoing evaluation,
position monitoring and portfolio balancing are an everyday process. We employ a realtime
profit and loss statement and review the portfolio daily. Twice weekly, the
Investment Manager formally goes through each position in the context of the overall
portfolio. This serves a very important function. The ongoing investment merit of each
position is considered. We ensure that the reason we bought the stock is still valid. Risk
assessment is also made for each security. Questions we consider include; at what price
do we eliminate the stock; what upcoming catalyst could nullify our investment thesis;
are there better stocks from a risk/reward standpoint that we should consider instead?
The ongoing process of monitoring and reviewing the investment merits of each security
in the portfolio is very important. If a stock is “acting” as we anticipated and the
fundamentals are unfolding as expected, the stock remains in the portfolio. Conversely,
if the catalytic event does not materialize or a position moves against us and triggers a
stop, it is sold.

This investment process is dynamic and must be performed daily in order to manage
changes effectively.