Winchester BluffPure Alpha Fund, LP

Introduction

Characteristics of the fund

The fund measures its success based on the absolute level of profitability and not “relative” performance vs. the market

Invests both long and short to capture profits in both rising and falling markets

Low volatility/beta (currently @ .14)

Low correlation to the broad market

Fund Profile

Ability to trade multiple instruments in asset classes around the world at any time

Employs proven indicators of Point & Figure Charting and Relative Strength

Employs objective technical analysis in conjunction with fundamental research

Our strategy works because we limit risk and adhere to a clear trading plan

 

Global Macro Strategy

Investment Universe

US StocksCash Fixed Income

Int’l Stocks Currencies Commodities

Fund Objectives

1. Not lose money

2. 15 + percent annual returns over the next decade

3. Continuous improvement by analyzing mistakes

4. Gain partners who share our philosophy of uncompromising risk management & enjoy experience

Investment Process

Active trading around core investments

Defines & limits downside risk by investing in uncorrelated pure alpha streams ("Alpha" in investing language is the return you achieve based on manager skill)

Invests in a core positions ranging from foreign bonds to currencies to commodities to global stocks

Invests in subsidiary holdings at the periphery of the core to enhance returns

Executes this dual complex strategy by constantly analyzing fifteen or more asset classes and simultaneously placing 30 or more trades

Invests in only the most liquid markets that it can get out of quickly if necessary

Portfolio construction process identifies what each position could add in terms of overall risk to the portfolio

Investment Process Outline

CORE POSITIONS

Technical Market

Analysis

Value Stock Screens

Special Situations/Niche Products/ Emerging

companies

Hedges (portfolio

protection)

Event-driven trades/StraddlesChart Pattern Recognition

Growth Stock Screens

Hope Is Not A Strategy

Buy the “Market” in 1929…

It took 25 years to get back to even

Buy it in 1973…

It took 7.6 years to get back to even

Starting in 1987 IBM went down 74%...

It took 10 years to recover

Cisco Systems (CSCO) was as high as $82 in 2000… It has yet to recover

The “buy-and-hold” myth:

Market and sector forces together typically cause 80% of the price

movement in a stock. That means the company fundamentals usually

account for less than 20% of a stock’s price movement. This is the reason a

company’s stock price sometimes seems to move independently of the

fundamentals.

Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King

Causes of Price Movement

Most people, however, spend

80% of their time on stock evaluation and only 20% on

sector and market evaluation. In other words, they ignore where

the greatest amount of risk lies – the market and sector forces.

Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King

Typical Resource Allocation

Fundamental Analysis vs. Technical Analysis

1. When to Buy

2. Positive Trends

3. Relative Strength

4. Broad Market Risk

5. When to Sell

What is Fundamental Analysis? What is Technical Analysis?

1. What to Buy

2. Company Management

3. Earnings Growth

4. Price/Earnings Value

5. New Products

Fundamental Analysis (What to Buy)GROWTH SCREEN

The Investors Business Daily (IBD) 85-85 Index Screen

IBD provides independent data ratings for every U.S. stock, including an Earnings Per Share (EPS) Rating and a Relative Strength (RS) Rating.

Their research shows that in every market over the last 50 years, the best stocks have had EPS and RS Ratings of 85 or better BEFORE they made their biggest gains.

The consistently superior performance of the IBD 85-85 Index reinforces this fact and is why we incorporate this screen as one of our primary tools:

From the total period 11/13/2000 to 2/28/2013, the IBD 85-85 returned 274%, while the S&P 500 Index returned 12%

Note: IBD's ratings are relative, with an 85 rating meaning the stock is outperforming 85% of all stocks in it's peer group. The Index is updated after the market close each Thursday. At that time, stocks no longer meeting the 85-85 criteria are removed, stocks now meeting the criteria are added, and those maintaining their ratings remain in the Index.

 

Fundamental Analysis, continuedVALUE SCREEN The Buffett/Graham Screen

This screen identifies companies with high quality business at undervalued prices

1. Stock price is less than the net current asset value of the company

2. During the past 12 months, the company generated positive operating cash flow

3. The company has no meaningful debt compared to its cash position

From back testing study 1998-2012, this group had an annual gain of 20% while the S&P 500 index averaged 2% a year.

  

Adding Technical Analysis Fundamental research tells us what ought to happen with a stock, while technical

analysis tells us what is happening with respect to supply and demand

Technical analysis, and in particular “Point & Figure” technical analysis, gives us the discipline to make decisions based on price

This logical approach helps reduce uncertainty in the market. It allows us to recognize market risk and therefore:

Move to cash/short assets when market indicators dictate that supply is in control Invest long and more aggressively when demand is in control

The ability to perceive and manage risk, and thereby preserve our investors’ capital, is our primary objective at Winchester Bluff

Supply and Demand We all understand the basic

forces of supply & demand

The same forces that affect prices in the supermarket also affect prices in the stock market

Stocks, sectors, and asset classes move in and out of favor just like produce at

the supermarket

Point & Figure Basics

Prices represented by X’s and O’s

Alternate columns of X’s and O’s

as the price changes

X’s = Price is rising

O’s = Price is falling

Trend-line shows strength or weakness

Chart Source: www.dorseywright.com

Why We Use The P&F Method:

Patterns are easy to recognize Trends lines are readily identified Objective price entry points can be establishedWith this tool, we can see both the near term and long term position of a stock

23 X <- Demand 22 X X X X X wins 21 X O X O X O X O X 20 X X O X O X O X O X X O X O O X O X O 19 X O X O X O X O X O 18 X O Notice that supply and demand X battled it out for a full year 17 X until demand won at $23 0 <- Year 0 0 1

Positive Trend Lines

Negative Trend Lines

Stock Filtering Process

45 OO X XO X O X O X XO X O X O X O X OO X O O X O X O

40 O X O X O OO O O

B SX X XX O X O X X

35 X O X X O X O XX O X O X O X O XX O X O X O OX O OX

30

Stock A Stock B

Measuring Market Risk

Now that you understand Point & Figure charting basics, we can move on to our most important indicator, the NYSE Bullish Percent.

NYSE Bullish Percent

Our Primary Market Indicator

Tells us whether to have the offense or defense on the field

It is calculated by taking the number of stocks in the NYSE on a buy signal, and dividing by the total number of stocks in the NYSE, resulting in a percentage

For example, if there were only 1,000 stocks on the NYSE and 500 were on buy signals, the resulting NYSE Bullish Percent would be 50%, which is then plotted on a Point & Figure chart.

Bullish Percent Chart:

• X’s = Offense – Wealth Accumulation

• O’s = Defense – Wealth Preservation

• Two Important Areas: 30% and 70%

• Measures Risk in the Market

• Does not have to move in tandem with the S&P 500 or the Dow Jones.

Market: Offense or Defense?

One of the most important considerations when investing is determining whether to take an offensive or defensive posture

When offense is suggested we employ the fund's assets by making stock purchases

When defense is suggested we work to protect existing positions and take advantage of shorting ideas

The Playbook – Offensive Plays

Buy Exchange Traded Funds (ETFs) Buy stocks on breakouts Buy leaders Consider deep value plays Employ liberal stop loss points Buy Offensive sectors (BP & X’s) Focus on strong technical stocks Buy on pullbacks Use trend-line stops Focus on strong relative strength Buy Call Options

The Playbook – Defensive Plays

Trim or take profits Short equities Reduce equity exposure Raise cash Sell weak RS stocks Buy Inverse funds Buy protective puts Tighten stops on long positions Increase non-correlated exposure

Winchester Bluff Pure Alpha Fund

How our process helps us invest with discipline

Common Investor Behavior

Over the past 30 years:

The average stock mutual fund has returned 10.7%

The average investor has returned only 3.7% The difference can be attributed to investors making

emotional decisions

For Example…

Removing Emotions

DECISION INPUT

WB Process Decisions are clear-cut

Emotion-based Investing Input comes from many sources and leads to second-guessing

AT DECISION TIME

WB Process Portfolio construction based on a set of rules

Emotion-based Investing There are no rules

Removing Emotions

COMFORT LEVEL

WB Process Investments are easily reevaluated as indicators change

Emotion-based Investing Decisions put off due to difficulty

EMOTIONS

WB Process Emotions are not a part of decision-making

Emotion-based Investing Emotions cause errors that can have disastrous effect

Removing EmotionsREACTING TO NEWS/MEDIA

WB Process No effect - we stick to an organized plan.

Emotion-based Investing The news causes most investors to panic

PEACE OF MIND

WB Process A lot

Emotion-based Investing None

Proprietary Process Recap

Investment Decision

Asset Evaluation

Fundamental Research

Independent

Statistics

Web-Based

Technology

Asset

Inventory

85-85

Screen

Value Screen

Portfolio Risk Analysis

Technical

Research

Market

Risk

Sector

Risk

Trend

Lines

Relative Strength

Chart Patterns

Continuous Improvement Process (Trade Evaluation Checklist)

Stock: Date:

Sector:

Positive (Y) Negative (N) CommentsMarket BP Sector BP

Value Screen

Growth Screen

Trend

Pattern

Consistent with current DALI

Favored Sector

Technical Attributes

Stop Loss %

Sell Analysis:1/3 when up 30%1/3 when up 50%When broke trend lineWhen Relative Strength changedWhen dropped back to first 1/3 sellWhen nothing happening 1+ monthHow did stock perform after sale

Long-Term Goal

Fund launch

Investment Process

&

Risk management

10-year average annual return goal: 15%

$100M AUM

Related Documents

Fund

Summary

Private Placement

Memorandum

Limited

Partnership

Agreement

Subscription

Agreement

Final Thoughts

What is most important is seeing that your money manager has a coherent process. PROCESS is the key.

Does the concept make sense? Is it robust? Is the organization committed to its discipline? Is risk managed during the inevitable downturns?

Over long stretches of time, having a strong process and good discipline makes all the difference.

Identifying good managers is a tough decision. Of course, we hope that your choice of a manager will be Winchester Bluff. The path to good returns is simple: find a manager whose process you are comfortable with and hang on through thick and thin.