New York (HedgeCo.Net) Deer Creek Capital Partners (“DCCP”) was founded in October 2002 and is a Colorado Registered Investment Advisor. DCCP is the investment manager for Deer Creek Long / Short Model. Recently we were able to speak with the Trent May, the portfolio manager for the model in order to learn more about the company, their investment philosophy and their approach to trading the market.

HedgeCoVest: Welcome and thank you for taking the time to speak with us.

Trent May: My pleasure.

HCV: How would you describe your investment philosophy?

TM: While we are a long/short fund, we are not a typical long/short fund. We start with a target beta for the portfolio as a whole based on our assessment of the overall market volatility and valuation. We then look for the most attractive investments to give us this targeted level of beta.

HCV: So you start with a top down approach?

TM: Exactly. We start with the question of what do we want the beta of the portfolio to be and then build the portfolio from there. You could say that we are sort of a hybrid between a long/short fund and a macro fund.

HCV: Do you think this differentiates your fund from the rest of the hedge fund world?

TM: Absolutely. That and we use a combination of U.S. indices and stocks as well as some foreign indices and we take a quantified approach to our analysis.

HCV: What would you say are the strengths of your strategy?

TM: I think the top down approach is a strength of the strategy. If the market is overvalued and is set for a fall, most stocks are going to go down. If you construct the portfolio with the right beta for a down market, you are going to fare better than most.

HCV: What are the weaknesses to the approach?

TM: The strategy hasn’t performed as well when there are sharp reversals. And when the yield curves are out of whack the valuations tend to get out of whack and then performance lags.

HCV: Is there a type of market where you feel like your strategy outperforms other investment approaches?

TM: When the market is more volatile there are more opportunities based on our methodology and there are more opportunities to add value. It isn’t a given, but the opportunities are certainly there for us to add value. We usually do well when the market is coming out of a high volatility period and valuations are low, because we will be heavily net long. Conversely if valuations are high and volatility is rising, we are going to be skewed toward the short side and looking for a correction.

HCV: You have mentioned volatility several times. What indicators do you use to measure volatility?

TM: We use a mix of standard measures such as the VIX and then we also have proprietary measures that we use. Between the standard ones and the proprietary ones, we get a pretty good depiction of where volatility is and where we think it is heading.

HCV: What measures do you take to reduce or eliminate risk?

TM: Because a lot of our investments are index based, we don’t really limit the exposure to one investment, but if it is an individual stock we won’t usually go above 10% on the exposure. So position sizing is one method of risk control. We also employ a drawdown control system whereby we reduce risk as we enter a drawdown. These are just a couple of the risk control examples we employ.

HCV: How often do you roll the portfolio over?

TM: Actually, the core holdings haven’t changed since the bottom in 2009. The weightings and the allocations have changed a number of times, but the core holdings are the same. We also rebalance on a regular basis. Another thing that we do is make tactical bets that will either hedge or complement the core holdings.

HCV: How many stocks do you typically keep in the portfolios?

TM: That can vary greatly based on what the model is telling us. About 80% of our allocations are made based on strategic asset allocation and 20% are based on tactical asset allocation. If the model and the volatility measures are suggesting a choppy market is coming, we will have more open positions than usual.

HCV: Looking at the performance numbers on the HedgeCoVest profile, I noticed a pretty significant drawdown in 2011. Could you explain that?

TM: As you know 2011 was a choppy market and in the summer of that year our model was suggesting that stocks were cheap and we were very long the market. From July to September that year, we were down 61%.

HCV: How long did it take you to recover from that drawdown?

TM: We were back to the highwater mark in September of 2012.

HCV: That is a pretty fast recovery.

TM: We have back-tested our model against different time periods all the way back to 1960. Because our model is so aggressive, it has tended to recover from all drawdowns rather quickly with the exception of 1973-74.

HCV: That is interesting that you have back-tested that far back.

TM: I think it is critical that you stick with your system if it makes money. There are many different strategies that can make you money, but each system will have periods where it is out of sync with the market. If you are constantly changing systems, you risk being out of sync all the time. Staying the course with a successful system is important to long-term success. Our models have been tested and we believe in them. At the beginning of 2009, the model showed stocks were undervalued and it stayed that way until September of 2013. Now the models are showing that stocks are a little overvalued and we have adjusted accordingly.

HCV: We are almost half way through the second quarter now, what is your take on what has transpired so far in 2015 and what do you for the rest of the year?

TM: We have seen an increase in volatility as of late and the majority of market participants have seemed to be more focused on the Fed than the economy itself. This created the situation where disappointing economic reports were viewed as good news for the market as the Fed would be forced not to raise rates. With most other major central banks cutting rates or taking action to stimulate their own economy, the dollar has rallied against other currencies. This really showed in the first quarter when small-cap names outperformed the S&P. At some point, we have to get good economic news in order to move the market higher. We can’t continue the game of bad economic news being good for stocks. If the economic data improves, I can see the dollar strengthening again and that should drive oil prices down and once again small-cap stocks should outperform on a relative basis. We see the market as being slightly overvalued at this point in time, probably in the 10-12% range. But it still looks like the market wants to move up and it may do so with a choppy grind higher.

HCV: Sounds interesting! Thank you for taking the time to speak with us Trent.