Brandywine Information with Q&A 2015_06

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS THE RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING WITH BRANDYWINE.

Brandywine’s

Symphony Program

Contacts:

Joe Gabor Rob Proctor Business Development Principal [email protected] [email protected] 610-361-1000 x102 610-361-1000 x105


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Contents

INTRODUCTION .......................................................................................................................... 3

HISTORY ...................................................................................................................................... 4

PRINCIPALS ................................................................................................................................. 5

PHILOSOPHY ............................................................................................................................... 6

RISK MANAGEMENT & PORTFOLIO ALLOCATION ...................................................................... 7

TRADING STRATEGIES ................................................................................................................. 8

PERFORMANCE ........................................................................................................................... 9

Brandywine Symphony Program (standard risk) .............................................................................. 10

Brandywine Symphony Preferred Fund (aggressive risk) ................................................................. 11

QUESTIONS & ANSWERS .......................................................................................................... 12

Philosophy ....................................................................................................................................... 12

Risk Management & Portfolio Allocation ......................................................................................... 16

A PERSONAL NOTE FROM BRANDYWINE’S FOUNDER ............................................................. 22

HOW TO INVEST WITH BRANDYWINE ...................................................................................... 23


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INTRODUCTION Brandywine’s Symphony Program incorporates multiple fundamentally-based trading strategies in a systematic, diversified portfolio that trades across more than 100 global financial and commodity markets. The program traces its roots to the successful Brandywine Benchmark Program that traded from 1991 through 1998 and incorporates additional non-correlated strategies developed in the 2000s. Because of its unique trading methodology, Brandywine’s Symphony Program produces returns that are uncorrelated to all major stock and bond market indexes, hedge funds and CTAs. Because of its broad strategy and market diversification, Brandywine’s Symphony Program is able to target double digit average annual returns with a maximum drawdown of less than 10%. Brandywine also offers the Brandywine Symphony Preferred Fund, which uses “notional” funding to trade at 3x the standard leverage of Brandywine’s Symphony Program. While Brandywine’s Symphony Program trades pursuant to fully systematic approaches, the trading model is not purely “quantitative” as defined by many traders and investors. Brandywine’s trading approach incorporates any trading strategy that is based on a sound underlying “Return Driver” (the underlying condition the drives the price of a market) that can also be rigidly quantified and tested. This includes the successful fundamental, seasonal, arbitrage, intermarket and short-term strategies Brandywine incorporated in its Benchmark Program in the 1990s, combined with additional non-correlated strategies developed in the 2000s.


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HISTORY

Mr. Dever began trading futures in 1979 when he developed a computerized trading program while a student at West Chester University. He founded Brandywine in 1982 and throughout the 1980’s traded around-the-clock in a wide range of markets on a discretionary basis. During that period he cataloged hundreds of trading ideas derived firsthand from his immersion in the markets. In the late 1980s and early 1990s, Mr. Dever led a research project that combined Brandywine’s in-house staff with researchers from Villanova, Wharton, West Chester, and St. John’s University (as part of a research project with the Chicago Board of Trade).

The resulting Brandywine Benchmark Program, launched in 1991, produced performance that was uncorrelated to traditional investments and other CTAs. Most importantly, its actual performance tracked the Program’s simulated performance over the prior decade.

The consistency and predictability of returns exhibited from the actual performance of the 1990s, matched by the tested performance prior and subsequent to that period, are a testament to Brandywine’s investment and research philosophy. This philosophy is based on the proven belief that predictability of performance can only be achieved by combining multiple uncorrelated trading strategies, each based on a sound logical premise, into a truly balanced and diversified portfolio. Past performance supports this belief. This philosophy also serves as the core tenet underlying Mr. Dever’s book, Exploiting the Myths: Profiting from Wall Street’s misguided beliefs (which became an Amazon best-seller under the popular title Jackass Investing: Don’t do it. Profit from it.). Brandywine’s Symphony Program was launched in July 2011 with 2/3 of the core strategies used by the Brandywine Benchmark Program during the 1990s. Additional strategies were developed to further diversify the program and increase its risk-adjusted returns. Since its launch, Brandywine’s Symphony Program has been on model in terms of returns and volatility, and its performance continues Brandywine’s history of non-correlation with CTAs, hedge funds and traditional investments.


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PRINCIPALS Mike Dever is the founder, Managing Partner and Director of Research of Brandywine Asset Management. Mr. Dever founded Brandywine in 1982. After nearly a decade of extensive discretionary trading, Mr. Dever began the 4-year research project that led to the launch of the highly successful Brandywine Benchmark program in 1991. Mr. Dever became an Internet pioneer when he founded Spree.com in 1996. Spree.com pioneered the use of "viral" and affiliate marketing to grow into the 7th most trafficked ecommerce site by the fall of 1998. Subsequent to raising a $13 million venture round, Mr. Dever left spree in 1999 and founded Mind Drivers, a venture development firm focused on creating and building highly scalable Internet businesses. In that role he co-founded InternetSeer.com and led the company through to its successful sale to Landmark Communications in July 2007. After a decade of success in operating Mind Drivers, Mr. Dever handed over its day-to-day operation to his long-time partners in 2010 in order to focus his attention and energy on Brandywine. Magazine Articles and Books Mr. Dever and his funds have been a featured subject in dozens of articles in publications including The Wall Street Journal, Barrons, Forbes, Futures Magazine, Philadelphia Business Journal, Philadelphia Inquirer, Futures and Options World, Wall Street and Technology, Financial Trader and MAR Hedge. Mr. Dever has also had a chapter devoted to him in each of three books:

Koppel, Robert. Bulls, Bears, and Millionaires. Dearborn, 1997.

Collins, Art. Market Beaters. Traders Press, 2004.

Kirschner, Sam et al. The Investor’s Guide to Hedge Funds. Wiley, 2006. Mr. Dever is the author of Exploiting the Myths: Profiting from Wall Street’s misguided beliefs (which became an Amazon best-seller under the popular title Jackass Investing: Don’t do it. Profit from it.), which was published in early 2011. The book espouses Mr. Dever’s belief in true investment diversification and statistically rebuts many of the common myths of investing, such as you can’t time the market, it’s bad to chase performance and there is no free lunch. (This last myth promotes Mr. Dever’s firm belief that there is a free lunch. It is true and balanced portfolio diversification, the basis of Brandywine’s Symphony program). Rob Proctor, CFA, is a Principal of Brandywine. Mr. Proctor has more than twenty years of investment management experience, primarily as a Registered Investment Advisor and head of Proctor Investment Management from 1984 through 1998. Prior to that, he was at Thomson McKinnon Securities from 1982 – 1984. He earned his Chartered Financial Analyst designation in 1994 and Certified Financial Planner (“CFP”) designation in 1987. In 1998 Mr. Proctor founded marine.com, an ecommerce community that also operates the SailNet.com website community.


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PHILOSOPHY Brandywine’s investment philosophy is based on the belief that the most consistent, persistent, and predictable investment returns across all market environments are best achieved by combining multiple uncorrelated trading strategies (each designed to profit from a logical, distinct “return driver”) into a truly diversified and systematically executed investment portfolio. Brandywine believes that:

Traditional approaches to investment management are unnecessarily self-limiting. The most consistent and predictable returns are earned through true portfolio

diversification. True portfolio diversification requires the use of multiple return drivers, applied to dozens of

uncorrelated markets.

Most investment firms talk about performance. But what they mean is that they will perform if “the market” allows them to perform. Brandywine takes a different approach. We incorporate multiple time-tested trading strategies that exploit a variety of independent return drivers. These return drivers, each based on a sound, logical premise, are capable of delivering positive returns under a variety of market conditions. Brandywine’s investment philosophy and process contains four primary elements:

1. Start with a sound concept (a “Return Driver”) that is capable of and expected to provide a positive inherent return.

2. Fully quantify the concept, developing it into a “trading strategy.” 3. Stress test the trading strategy across as many markets as it is applicable to, across hundreds

of variable permutations, and over an extended time period. 4. Combine multiple, uncorrelated strategies that derive their performance from separate

return drivers, into a balanced, diversified trading model that provides a high degree of predictability of future performance.

Brandywine’s Symphony program is comprised of dozens of such trading strategies.


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RISK MANAGEMENT & PORTFOLIO ALLOCATION Brandywine takes a very “top-down” approach to risk management and portfolio allocation. Because Brandywine’s Symphony Program incorporates trading strategies that are based on a wide variety of return drivers (that use inputs such as fundamental, sentiment, or event data instead of just price data) to trade across well over 100 global financial and commodity markets, by necessity, portfolio allocation is an integral part of Brandywine’s Symphony program. Brandywine’s model was initially developed during the research phase of the Brandywine Benchmark program in the late 1980’s – early 1990’s. At first Brandywine focused on leveraging the existing state-of-the-art in portfolio modeling, hiring consultants to assist in the model development. What became apparent to Brandywine was that all of the popular (and Nobel Prize winning) allocation and risk management models contained several fatal flaws; the most egregious being that they were focused on providing “optimal” results on past data. Because of this focus on “optimizing” on past data, actual future results seldom matched the past tested results. Aware of this, portfolio managers usually constrained or modified the output from the models, often by imposing market or sector constraints, essentially putting a band-aid on the wound created by an incorrect (damaging) portfolio allocation model. In contrast, rather than asking what model would produce the most optimal returns, Brandywine asked “what model would produce the most predictable returns.” As logical as that sounds, it was novel then and continues to remain novel today. Most managers continue to base the success of their portfolio allocation / risk management models on how well they “optimize” returns on past data, not on how well future returns are likely to match those past results. After years of research, Brandywine developed our “Predictive Diversification” portfolio allocation model. The model is based on the proven belief that the greatest probability that future performance will match past performance is achieved by establishing balance across the markets and trading strategies employed in the portfolio. An integral benefit to creating a portfolio model focused on predictability is that risk management is naturally achieved by maintaining a balanced allocation among all strategies and markets traded in the portfolio. The result is that, over time, no single trading strategy or group of related trading strategies, and no single market, or market sector, dominates performance. The outcome has been that the actual trading performance of the Brandywine Benchmark program in the 1990’s and Brandywine’s Symphony program today have closely matched their prior walk-forward tested performances. We now have more history (certainly more than today’s largest CTAs) that supports Brandywine’s initial portfolio allocation research and conclusion arrived at more than 20 years ago.


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TRADING STRATEGIES Brandywine’s Symphony program employs dozens of trading strategies to trade across more than 100 global financial and commodity markets. Unlike most managers or funds-of-funds that incorporate multiple strategies or individual managers, the risk-return profile of each individual trading strategy is of little importance to Brandywine. We care only that the return driver is sound and that the strategy is likely to provide a positive return based on that return driver over an extended multi-decade period. It is only at the portfolio level that Brandywine’s “Predictive Diversification” portfolio allocation model focuses on risk-return. Also, because each strategy is to be incorporated into a broadly diversified portfolio (that contains more than 1,000 strategy-market combinations) and will essentially be fully-funded on a continuous basis (based on how our portfolio allocation model works), individual strategy risk can be offset with other strategies in the portfolio. In fact, the individual trading strategies incorporated in Symphony are designed to be used in combination with each other. Some of the strategies serve as alpha hedges for other strategies in the portfolio. Without one we wouldn’t include the other. As a result, like a Symphony orchestra, Brandywine Symphony’s value is even greater than the sum of its highly talented constituents. Brandywine’s portfolio allocation model, developed specifically to accommodate these diverse return drivers, serves as the conductor and balances the risk allocation across the strategies and markets in the portfolio. This diversity of trading strategies and markets, combined in a balanced portfolio, is what improves the predictability of our performance. For illustrative purposes, we have categorized our trading strategies into five strategy-types:

Fundamental

Sentiment

Event

Arbitrage

Alpha Hedge Our categorization of strategies is somewhat arbitrary, however. We could just as easily have created and organized our trading strategies into a dozen alternative strategy-type classifications, such as “counter-trend,” “short-term,” or “seasonal;” or by time-frame, <5 days, 6 days – one month, etc. Furthermore, virtually all of our strategies are uncorrelated to the other strategies in the portfolio. So even though we may categorize a number of strategies as “sentiment-based,” they are not related to each other in the traditional “asset class” sense.


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PERFORMANCE Brandywine currently offers investors the opportunity to invest in either the standard risk Brandywine Symphony Program (which targets an 8% annualized standard deviation) or aggressive risk Brandywine Symphony Preferred Fund (which targets a 25% annualized standard deviation and a maximum drawdown of approximately half that likely to be suffered by an investment in the S&P 500). Investments can be made either into one of Brandywine’s funds or through individually managed accounts.

Brandywine Symphony Program (standard risk) Brandywine’s Symphony Program incorporates multiple fundamentally-based trading strategies in a systematic, diversified portfolio that trades across more than 100 global financial and commodity markets. Because of its unique trading methodology, Brandywine’s Symphony Program produces returns that are uncorrelated to all ‘traditional’ investments such as stocks and bonds, as well as hedge funds and CTAs.

Brandywine Symphony Preferred Fund (aggressive risk comparable to S&P 500) Brandywine Symphony Preferred Fund is aggressively-traded at three times the standard leverage of Brandywine’s Symphony Program. This risk profile is designed to set the drawdown risk of Brandywine’s Symphony Preferred to approximately half that of an investment in the S&P 500. The performances of the standard and aggressive risk program and fund are displayed on the following two pages.


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Brandywine Symphony Program (standard risk)

Performance is net to investor after paying all management and incentive fees


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Brandywine Symphony Preferred Fund (aggressive risk)

Performance is net to investor of all management and incentive fees


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QUESTIONS & ANSWERS

Philosophy How do you generate trading ideas and what is the policy and procedure for taking an idea from concept to market? Brandywine’s research process follows the scientific method. We begin with a hypothesis, quantify that hypothesis, test it against historical data and finally, against a blind data set (this is essentially the “forecasting” step). This process results in fundamentally sound strategies that each has a valid basis for providing us with a positive inherent return. A strategy is clearly defined, quantified and then back-tested, with a primary focus on determining the robustness of the strategy. If a strategy is deemed to be effective and robust in its back-testing, it is further tested against a blind data set. If it continues to perform as expected, it is then integrated into Brandywine’s trading program, where it produces real-time trade signals. Please outline your back testing procedures and processes? Brandywine’s “Cadence” research platform allows Brandywine to test every variable across multiple parameter sets, often resulting in hundreds of combinations. The purpose is not to find the ‘optimal’ parameter set, but to establish the sensitivity to parameter changes and the robustness of each strategy. Each trading strategy starts with a logical premise (its “return driver”) that is expected to provide a positive inherent return in the future. Those return drivers are then quantified, resulting in an algorithm designed to capture the return from that return driver. The back-testing starts at that point. Brandywine’s interest is not to find the optimal result (parameter set) but to determine if the strategy is sustainable, and if so, to select the parameter set that is most likely to produce future results consistent with past results. This parameter set is almost never the best-performing parameter set. Brandywine then walks forward the testing across a blind simulation data set to confirm the validity and robustness of the trading strategy. What process will you apply to discontinue using a trading strategy within the Portfolio? Have you done this in the past and, if so, please describe the process that was followed and the reasoning? As long as we determine that the underlying return driver remains valid, Brandywine will not discontinue using a trading strategy. We have, however, ceased trading in individual trading strategies that became irrelevant. For example, approximately 1/3 of the trading strategies utilized by Brandywine 20 years ago are invalid today (or required modification to use). These include strategies that had incorporated Commitment of Traders information (as those reports moved to a weekly release instead of monthly) and some shorter-term strategies that were based on market structure, which became invalid when most markets moved to 24-hour electronic trading.


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What were the market observations that led you to design your trading system? Brandywine’s founder, Michael Dever, began trading futures in 1979 using computer-driven systematic models for decision-support. This process continued throughout the 1980s, with Mr. Dever trading a broad range of futures and currency markets utilizing a variety of investment techniques. It was during this period that he first began cataloguing his observations and prioritizing Brandywine’s research into the behavior of the global financial and commodity markets. In 1987, Mr. Dever undertook an extensive research project that resulted in the quantification of his observations and the initial systematization of the investment process. This project involved more than two-dozen researchers. During the 1990s, Mr. Dever continued to develop an expertise in utilizing time-tested, systematic, yet broadly diverse trading strategies to invest in a variety of asset classes, including equities, foreign exchange, commodities and futures. Trading was conducted through Brandywine Asset Management, which Mr. Dever founded in 1982. Brandywine’s research process, based on this long history of research and trading expertise, follows the scientific method. We begin with a hypothesis, quantify that hypothesis, test it against historical data and finally, against a blind data set (this is essentially the “forecasting” step). This process results in fundamentally sound strategies that each has a valid basis for providing us with a positive inherent return. In the late 1980’s – early 1990’s Brandywine developed its portfolio allocation model, which was required in order to determine the allocations to be made across each trading strategy and market in the portfolio. At that time Brandywine recognized that the existing methodologies, such as those focused on optimizing risk/return based on mean-variance modeling, while providing ‘optimal’ results on past data, did not provide ‘predictable’ results. In response, Brandywine focused its portfolio modeling research on creating an allocation formula that produced the most predictable results. The outcome was that the actual trading performance of the Brandywine Benchmark program throughout the 1990s closely matched the prior walk-forward tested performance expected of the program. Some elements of Brandywine’s portfolio allocation model are today known as “risk parity” investing. Brandywine re-launched its trading with the Symphony program in July 2011. Brandywine continues its legacy of research and continues to incorporate additional trading strategies and markets in order to further diversify the source of its returns. What are the limitations of your system or approach? The strengths are our systematic use of multiple, unique trading strategies to create a diversified source of returns that is not reliant on any single market environment or condition to produce profits. Our weakness is our inability to respond “on the fly” to exogenous market-impacting events, as our model demands a systematic, fully back-tested approach to trading.


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Do you anticipate having to make any changes to your system in the future? Change, primarily through the addition of new trading strategies, is at the heart of Brandywine’s philosophy. Brandywine believes there are always new trading strategies that can be developed that will further diversify our return stream. Every new strategy concept must be based on a logical premise capable of providing a positive inherent return (a “Return Driver”). If it is deemed to be sufficiently different from other strategies already utilized, then it is added to the Brandywine research schedule. What research, if any, are you doing on an ongoing basis? Ongoing research is a fundamental tenet of Brandywine’s investment philosophy. Brandywine’s efforts are generally focused on the development of new trading strategies that will add diversification to the portfolio, rather than the “tweaking” of existing trading strategies. Please provide your insight into the behavior of markets. What market inefficiencies do you attempt to capture and why are these inefficiencies exploitable? Brandywine does not attempt to exploit any single market inefficiency. Each trading strategy is developed by Brandywine with the intent of capturing returns from a specific Return Driver. There are numerous biases in people’s behavior related to trading/investing/gambling, and Brandywine seeks to exploit those biases. (This philosophy led to Mr. Dever writing his book Exploiting the Myths: Profiting from Wall Street’s misguided beliefs (which became a best-seller under the popular title Jackass Investing). These biases include the desire to “trade with the crowd,” anchoring biases, risk aversion, and numerous other behaviors and emotional responses that create inefficiencies that lead to the development of profitable trading strategies. These strategies provide excellent potential returns and diversification value in a ‘rationally-structured’ portfolio such as Brandywine’s. For example, in Myth #3 of Mr. Dever’s book, titled “You Can’t Time the Market,” Mr. Dever shows that precisely because the majority of people buy and sell U.S. equities at the wrong time, if you can measure this activity you can fade it for profit. In the Action Section for the book, he presents a specific trading strategy that does exactly this by measuring the money flows into and out of U.S. equity ETFs. Other trading strategies gain their edge by the fact that they are ‘hard’ to trade. For example, they may be subject to high volatility of returns. Many traders prefer strategies with low volatility and therefore ignore exploiting sound return drivers that result in positive and predictable returns over time if those returns are too volatile. These strategies provide excellent positive returns and diversification value in a portfolio such as Brandywine’s.

http://www.returndrivers.com/


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Does your statistical model implement or extend published research? This is specific to each trading strategy in the portfolio. Over the past 30+ years Brandywine and Mr. Dever have cataloged hundreds of trading strategy concepts, some based on market observations and experience and others based on academic research or published reports by or discussions with other traders. These are prioritized and researched based on their perceived ability to provide value to the portfolio. What is your future direction of research and why do you feel you have an advantage over all the other PhD research operations looking at the same set of data. Brandywine’s many years of experience in researching and trading a broad range of markets and methodologies has produced the accumulation of independent trading strategies that comprise our uncorrelated Symphony program. It’s not a process that can be replicated overnight. Additionally, Brandywine has learned that intelligence does not in itself lead to successful trading. History is replete with investment organizations with highly intelligent researchers that start by asking the wrong questions. As a result, they will never reach the correct answer or achieve long-term investing success (Long Term Capital Management is just one highly visible example). There are numerous other organizations, with tremendous resources and research capabilities that self-limit their potential. Many of these organizations, due to restrictions in their mandate or other constraints, concentrate their efforts on “tweaking” their existing investment process rather than developing entirely new approaches to improve their risk-adjusted returns. This gives Brandywine a definite edge. In addition, Brandywine has developed and implemented:

a well-organized strategy development process;

proven research methodology and platform;

real-time experience in portfolio modelling; and

organizational and technology infrastructure capable of managing investing across multiple strategies and markets on a 24 hour basis.

How is Brandywine’s approach different from other CTA’s (such as Winton, Transtrend, QIM)? We don’t aggressively compare ourselves to other CTA’s (although investors often seem to want us to), primarily because we have little ‘real’ knowledge of what most of them do to make money. (Brandywine was the first outside investor in Transtrend in 1992. Despite that, we have no recent knowledge of their research or trading approach). However, on the surface it appears that we take quite a different approach to our strategy development, portfolio allocation, and risk management (especially) than the others. We’ve been told that by other managers and many of the institutional investors we have presented to who have more knowledge of the other managers. That, and statistical comparisons, is what leads us to believe that by investing with Brandywine we can smooth the results of people who also have money allocated to the other established managers.


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QUESTIONS & ANSWERS

Risk Management & Portfolio Allocation What were the major challenges you faced in the development of your strategy research, risk management and portfolio allocation model. Brandywine began the initial research into our trading model in the late 1980s. At that time there were no off-the-shelf software products capable of performing the fundamental research required by Brandywine. Furthermore, right from the start Brandywine knew the portfolio allocation model would be integral to our trading model. Brandywine quickly came to realize that the existing (not just at that time but continuing to today) portfolio modeling research and published academic studies were severely flawed, primarily because the goal of those models has been to ‘optimize’ returns, rather than create a return stream that is highly predictable regarding future results. So Brandywine faced many challenges. We first conducted research into portfolio allocation and risk management. This led to the portfolio allocation model used by Brandywine throughout the 1990s and continuing, with occasional improvements, today. Elements of Brandywine’s portfolio allocation model have become popularized today as “risk parity’ investing. But whereas Brandywine balances risk across return drivers and markets, risk parity investors are constrained by the use of asset classes. As a result they actually end up with very unbalanced portfolios. We then developed our own research platform, originally written in C and C+, today in JAVA. This platform (named “Cadence”) provides us with the flexibility to test any fundamentally-based or technical trading system and determine its robustness. Are there any counterintuitive implications to risk management that you derived from your model? Certainly, the determination in the late 1980s that mean-variance optimization of a portfolio was fatally flawed was the first major counter-intuitive outcome of our research, as that was the most highly-regarded and accepted portfolio allocation model of the time (and to a large extent remains so today). Second, many potential investors we talked with at that time were convinced that each individual trading strategy within our model was required to be able to “stand on its own” with regards to its risk-adjusted returns. Brandywine determined that the only relevant question at the individual strategy level was if the strategy was based on a sound logical return driver likely to provide it with a positive return over time. This led us to develop and implement many trading strategies that were, and continue to be, unique to Brandywine. Strategies compliment each other….************************************


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Please elaborate on your risk management plan. Do you have specific limits on exposure to markets/sectors or is it possible that several different portfolio strategies may signal positions in the same market/sector? Brandywine’s portfolio allocation model is designed to provide balance across each strategy and market traded in the portfolio. This is intended to ensure that, over time, each market makes an equal contribution to the portfolio’s risk. Brandywine takes a very “top-down” approach to risk management and portfolio allocation. Our belief is that if a portfolio allocation model results in a significant overweight of a market or related (correlated) group of markets, that is a symptom of a flaw in that model. Mike Dever covered this topic specifically in his well-received presentation titled “The Fatal Flaw in Mean-Variance Optimization” at the QuantInvest conference in NYC in 2012. Many managers address the flaw in their portfolio allocation models by imposing market or sector constraints, essentially putting a band-aid on the wound created by an incorrect (damaging) portfolio allocation model. Brandywine’s goal when Mike Dever developed our portfolio allocation model in the late 1980s – early 1990s was to create a model that – first and foremost – produced future results that matched, as closely as possible, past results. As logical as that sounds, it was novel then and continues to remain novel today. Most managers base the success of their portfolio allocation / risk management models on how well they “optimize” returns on past data, not on how well future returns are likely to match those past returns. They start their research by asking the wrong question - (“How can I get the best results?”, rather than “How can I get the most predictable results?”). Many (most) managers make that initial critical mistake of optimization vs. predictability. In response to the specific question: YES - several of the underlying trading strategies can pick the same contract or market, but NO, by design the portfolio allocation model will not significantly overweight any market. However, because multiple trading strategies agree on a specific trade/position, there is a higher probability that will be a successful trade. Our portfolio allocation model then naturally allocates more to higher probability opportunities but within the construct that future performance will continue to match past performance. So in summary, we WANT to have heavier allocations to positions when multiple trading strategies are in agreement. How have you assessed the statistical accuracy of your model? Statistics lie when they are misused. Brandywine has seen many instances of the misuse of statistics by other managers in order to prove the validity of their trading models (Mr. Dever illustrates one such example in the “One-in-a-million” section of Myth #2 of his book, Exploiting the Myths). The primary basis we use for determining the statistical accuracy of our trading model is to make sure; first and foremost, each individual trading strategy is based on a sound, logical return driver. We then confirm the robustness of that return driver across numerous parameter sets and market conditions and by ensuring that the blind test results of each trading strategy closely match the back-tested results.


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Do you impose limits on positions in specific geographic regions in order to reduce the potential for losses following major events, such as the Japanese earthquake/tsunami? We understand that many managers impose such limits; however, if those managers have identified that their portfolio allocation model is flawed (in that it outputs allocations that create uncompensated risk exposure and produces risk that is out of line with historical risk exposure), they need to fix their model rather than constrain its results. Brandywine’s trading strategies are each based on an identifiable “return driver,” some of which can be identified as “event-based” return drivers. A tsunami is an event and has the potential of moving markets. If that event created losses that were too big for other managers, those managers have a flaw in their allocation model. Additionally, we often hear managers making statements that either indicates a misunderstanding of the true cause of the losses in their portfolio or that intentionally attribute those losses to a popular event. In those cases the tsunami didn’t give them big losses at all, it just revealed a fatal flaw in their own risk management that rather than find and fix at the core, they paper over with constraints at the end. Do you impose limits on losses due to a specific strategy, group of strategies, or to the total portfolio? We do not impose limits on specific strategies, groups, or the entire portfolio. Our portfolio allocation model allows us to create a risk profile, and that gives us various probabilities of losses occurring. Our current standard risk level of Brandywine’s Symphony Program is an 8% annualized standard deviation and a 10% probability of suffering a 10% drawdown from peak equity over a ten year period. If an investor wants to use that information to set up their own stop-loss levels at the portfolio level, we’re fine with that. But as long as the underlying return drivers for each of our trading strategies remains valid, we will continue to trade pursuant to each of those strategies. Do you alter market exposure based on recent performance and/or risk? No. Equity curve timing is a big mistake. We understand its attraction. It’s easy to look back over an equity curve and identify periods where allocations should have been increased or decreased. And it’s possible to create formulas that do this and that withstand traditional statistical analysis regarding their level of significance. But by doing so you just created a single trading strategy (the timing of the overall portfolio leverage) that now dominates portfolio performance. This runs completely counter to Brandywine’s belief in portfolio balance. That directive is completely violated if one strategy (especially a portfolio allocation strategy) dominates portfolio performance. Simply put, equity curve timing, as well as setting constraints on position sizes or geographic allocations, are all crutches that indicate underlying flaws in the core portfolio allocation model.


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Do you re-allocate to strategies based on recent performance and/or risk? We do not change strategy weightings due to performance, and we do not do so due to risk. The reason for that is similar to our response to the equity curve timing question above. That said, Brandywine does calculate a “strategy multiplier” for each trading strategy that is based on a number of factors, including performance correlations, return driver basis, time-in-market, and normalized volatility. These strategy multipliers are re-calculated every time a new trading strategy is added to the portfolio. Short-term portfolio risk is more closely managed as an automatic part of the portfolio allocation model through changes in market allocations, for which an MPS (“market position size”) value is calculated for each market based on changing market volatilities and correlations. We realize some managers think they can time performance. Our approach is that if the return driver underlying that strategy is still valid for that market, it should continue to be traded. As a result, Brandywine employs trading strategies in a number of markets that are valid, yet have failed to profit for decades at a time. But those negative performances are reflected in Brandywine’s track record, both actual and simulated. It’s quite possible that for the next couple of decades those may be the best-performers for those strategies. Managers that cherry pick strategy-market combinations based on performance, rather than a sound understanding of the underlying return drivers are just fooling themselves and creating track records that have a low predictability that future performance will match past performance. We understand the appeal of this to managers who are looking for a ‘quick fix’ rather than researching additional trading strategies based on diversifying return drivers (or who are unable to diversify because they have positioned themselves as a specific style of trader, such as a trend follower or short-term pattern trader, for example). But this doesn’t make it right. The result would still be that the performance of that portion of the portfolio was now dominated by that timing strategy, rather than being diversified across trading strategies. It is Brandywine’s primary desire that our overall portfolio reflects the average of the combined performances of our individual trading strategies as closely as possible, because we like the performances of each of the trading strategies and, as our prime directive is to achieve predictable performance, want to see that performance replicated in future trading. Adhering to a portfolio allocation model focused on maintaining strategy/market balance, without additional overlays or constraints, is the best way to achieve this goal. How do you determine how many contracts to trade for each individual market or trade signal? Do you set limits on position sizes? Brandywine’s position sizes are the result of the interaction of positions signalled by numerous independent trading strategies. The position size in each market is a result of the weighting applied to each strategy in the portfolio and the weighting applied to each market. There is no additional over-riding maximum position size applied to each market, because the strategy weightings already take into account the correlation risks among the strategies, and the market weightings are adjusted for market volatilities and correlations.


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Explain how your methodology reacts to volatility changes in the market. Brandywine’s portfolio allocation model adjusts market positions based on changes in each market’s volatility, among other factors. As volatility increases, everything else being equal, position sizes in a market will decrease. Some strategies use volatility as an input in the trade decision process and so may enter or exit positions as a result of changes in a market’s volatility. Do you add to profitable positions? This is dependent on the interaction of the various trading strategies in the portfolio. Often, the end result of the interaction of our various strategies is to see positions building as profits increase. At other times the opposite may appear to be true, as certain strategies enter into positions opposite profitable positions that have accumulated, thereby making it appear that Brandywine is ‘taking profits.” In reality, position adjustments in Brandywine’s portfolio are often simply the result of the interaction of the various trading strategies. Do you add to losing positions? Position adjustments across Brandywine’s portfolio are the result of the interaction of the various trading strategies. It is quite possible that a position in a market will be increased following losses, but not because one of the ‘losing’ trading strategies is signaling an increase, but because a different trading strategy is entering a position in the same direction as is currently held in the portfolio (or existing a position that was held in the opposite direction). That said, Brandywine does have some fundamentally-based counter-trend trading strategies that will add to losing positions specific to that strategy. The uncorrelated trades signalled by some of Brandywine’s fundamental, arbitrage and sentiment strategies may also contribute to this effect. What would you do if a market within the program significantly underperforms for a period of time that you see as a reasonable sample period? We have strategy/market combinations that have produced net losses throughout our entire test period. As long as the return driver remains valid for that strategy in that market, we will continue to employ that strategy in that market. Please elaborate on your optimization process. Brandywine’s trading strategies and portfolio allocation model are all designed to produce future results that match past returns (whether tested or actual) as closely as possible. That is the goal. They are not optimized for performance. (The fatal flaw in mean-variance optimization is precisely the fact that it is designed to produce optimal returns, rather than predictable returns). In fact, as long as a return driver is a relevant driver for a particular market, that market is included in the portfolio for that trading strategy, even if in its testing it has produced losses. That is because it is still relevant. The result is that our past performance includes numerous strategy/market performances that were unprofitable in past trading. Those same markets may further underperform in the future


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or perhaps they will become the top-performers and other, past top-performers, will become the underperformers. The main point is that they are all included in the portfolio for any given trading strategy that incorporates a return driver for which they are relevant. Do you ever override your system’s signals? No.


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A PERSONAL NOTE FROM BRANDYWINE’S FOUNDER Brandywine is an established investment firm with a fresh perspective on research and trading. In my book Exploiting the Myths: Profiting from Wall Street’s misguided beliefs (which became an Amazon best-seller under the popular title Jackass Investing: Don’t do it. Profit from it.), I expose the myth that investors can obtain portfolio diversification by spreading their money across positions in stocks, bonds and real estate. Unfortunately, this exposes people to unnecessary “event risk” that can quickly turn a portfolio into a “poor-folio.” In contrast, true portfolio diversification can only be obtained by balancing positions in multiple markets across multiple trading strategies that are each based on a distinct return driver. (A return driver is the primary underlying condition that drives the price of a market.) In this fashion no single economic or political event can adversely affect your portfolio. Better yet, your portfolio will have the potential to grow independently of market conditions. Brandywine has more than 30 years of experience in creating and managing truly diversified portfolios. It’s not a process that can be replicated overnight. Our experience means that we have compiled an exhaustively-researched portfolio of trading strategies that required decades to develop. Many of these were derived from our actual trading experience. Some of these strategies take long-term positions based on underlying fundamentals, while others look at market sentiment, reactions to events, and arbitrage opportunities to capture mispricings in global financial and commodity markets. In all, Brandywine employs more than 1,000 strategy-market combinations. It has taken many years and the efforts of dozens of talented people to develop Brandywine’s Symphony Program and the research, trading and back office systems to support the program. Although we are an experienced trading firm, we maintain a fresh, energetic and single-minded focus on performance. While I believe that Brandywine’s Symphony is among the finest investment programs available today, I can see no reason to slow down our research effort. Our backlog of trading strategies and research ideas is larger today than when we were in the midst of trading our successful Benchmark program in the 1990s. There are a plethora of opportunities that will enable us to continue to increase our risk-adjusted returns across all market conditions. Each new successful trading strategy we develop stimulates ideas for many more. There is no need to take unnecessary risks with your portfolio (my definition of “Jackass Investing”). If you feel it is time for a change – time to replace your conventional poor-folio with a truly diversified portfolio – we look forward to helping you get started today. Michael Dever CEO & Director of Research Brandywine Asset Management


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HOW TO INVEST WITH BRANDYWINE An investment in the Brandywine Symphony Program provides you with immediate global market diversification, as well as exposure to a wide range of diversified return drivers. Investments may be made through the Brandywine Symphony Fund, the Brandywine Symphony Preferred Fund, or individually managed accounts.

Brandywine Symphony, LP

Minimum Investment: $100,000 Liquidity: Monthly additions/redemptions Fees: - Management: 2% Annual Fee (1/6 of 1% paid monthly)

- Incentive: 20% of Net New Trading Profits (paid quarterly). Losses are carried forward

Risk Level: Targets 12% annualized returns and 8% annualized volatility Reporting: Monthly account reports plus annual report and audit Investor Protections: Independent 3rd party administrator & audited annual report Brandywine Symphony Preferred Fund, LP

Minimum Investment: $100,000 Liquidity: Monthly additions/redemptions Fees: - Option #1

2% Management fee on nominal account size. The nominal account size is three times the cash invested

20% Incentive fee - Option #2 0% Management fee, 33% Incentive fee

Risk Level: Aggressive – Trades at 3x the standard leverage of Brandywine’s Symphony Program

Reporting: Monthly account reports plus annual report and audit Investor Protections: Independent 3rd party administrator & audited annual report Brandywine Symphony Individually Managed Account

Minimum Investment: $5,000,000 (as little as $1,500,000 cash - notional funding accepted) Liquidity: Daily on 24-hour notice Fees: - Management: 2% of nominal account size (1/6 of 1% paid

monthly) - Incentive: 20% of Net New Trading Profits (paid quarterly)

Risk Level: Notional funding can be adjusted to trade accounts at a leverage/risk level customized for each investor.

Reporting: Daily from broker Broker: Flexibility for you to select a broker of your choice Investor Protections: Funds held in client’s name

Brandywine Information with Q&A 2015_06

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