True Hedge Funds

1. MARKET NEUTRAL INVESTING
Many investors are concerned that the U.S. equity markets are “Fully” if not “Overvalued” and
not sure where we go from here.
On one hand, the Bull market in the U.S. is well into its 7th
year and stock values in U.S. equities
as measured by Price Earnings Ratios are toward the higher end of the range with some areas of
the market being in bubble territory.
On the other hand, compelling evidence exists that the Global Economic Recovery remains in its
early stages with Europe, China Japan and others providing U.S. style economic stimulus (QE)
to their economies in the form of low interest rates and or the purchase of bonds and other assets
from banks to free up capital to be put back into the system.
Most rational observers see the merits of both views and are simply confused while carrying the
lessons of 2008 and 1999 fresh in their minds and psyches.
Many investors are looking for direction to avoid steep losses if the bears are correct yet, want to
take advantage of the continued upside if the Bulls are still right and we are in the early stages of
the Global Recovery with the U.S. haven taken an early lead. In summary these investors feel as
follows:
Market may be approaching a Top, or is due for a pull-back
Do not want a repeat of 2008 by being fully exposed
Seek positive returns in both Up and Down Markets
Concerned with market volatility and would like protection
Generally the options that investors consider for protecting against investment losses include the
following:
Selling and going to Cash
Investing in Bonds
Buying Alternative or Uncorrelated Assets
Owning Defensive Stocks such as: Food, Beverages, Utilities, Pharmaceuticals, etc.
Short Selling Overpriced Stocks
Acquiring Protective Puts and/or overlaying with a Call writing strategy
Rotating to deeply discounted or beaten down asset classes

2. And while each of these strategies offer benefits and risks, all involve some element of Market
Timing, something that most agree is difficult if not impossible to achieve and can result in
exacerbating and compounding the very losses that the investor is seeking to avoid.
One strategy that we believe makes sense in a mixed signal market such as the one we find
ourselves in is a True Hedge Fund or a Market Neutral Fund. Unfortunately, the term Hedge
Fund has become a catch all label for a variety of different strategies involving virtually every
investable asset class in which the manager may be short.
The mechanics of achieving market neutrality involve being simultaneously long and short in an
equal number of positions.
Short positions rise in value when a market declines, while long positions increase when markets
advance. Thus, in the event of a market sell-off the overvalued stocks should decline more than
the undervalued holdings. In this scenario, the portfolio will generate a positive return.
However, if the market sell-off is indiscriminate, that is everything sells off equally, then with
market neutrality, the portfolio should generate a zero return, no gain and no loss. i
Some managers juxtapose long and short positions using market sectors, industries or even
countries or currencies. That is, they are long (Own) stocks in the industries that they believe are
going to rise and Short (Sold) stocks in the industries that they feel are overvalued and due to
decline. The concept can be applied against currencies, asset classes and countries, etc.:
Long U.S, Dollar Short The Euro
Long Gold Short Oil
Long India Short China
However, we believe that portfolios with a skilled manager who builds a portfolio stock-by-
stock, buying companies that are undervalued due to something other than fundamentals and
short selling companies that are overvalued for reasons other than fundamentals.
Non-Fundamental reasons for stocks to be undervalued include: market overreactions to an
earnings miss; overall (indiscriminate market sell-off); currency devaluation for non-U.S. Stocks;
short-term geo political tension.
Over valuation drivers include: momentum; investor plowing in because nobody want to miss
the action: Excitement over the story; company is an industry disrupter or at the cusp of a new
paradigm, etc.
A True Market Neutral Portfolio will hold long and short positions in similar percentages rather
than tilt its exposure and attempt to bet on the direction of the market. The goal is to “zero-out”
broad market risk and capture the spread between overvalued and undervalued stocks.

3. The preceding represents the views and opinions of The Stanley-Laman Group, Ltd., a
Registered Investment Advisor serving individual and institutional investors and is not
intended to be investment advice suitable for all investment objectives. The investment
strategies above can result in the loss of principal. A long-short or neutral strategy such as
outlined offers inherent risk.