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West is Best for Sunrise CapitalSan Diego-based hedge fund offers low market correlation, high liquidity, and a solid long-term performance record, far from the financial centers of New York and London

As the biggest systematic hedge fund in a city known more for its U.S. navy base and sunny weather than its asset-management sector, San Diego-based Sunrise Capital Partners can be considered a big fish in a little pond. But its performance record is one that many New York and London hedge funds would envy.

Founded in 1980, Sunrise Capital Part-ners is a systematic global macro fund that manages more than $800 million for individual and institutional investors. The company says its business is based on a deep, experience-based knowledge of more than 70 global markets traded; a research-driven, systematic global macro trading strategy that is adaptable and evolutionary; and a client-focused business approach.

Sunrise offers two programs for invest-ment: the Sunrise Expanded Diversified Program and the Sunrise Aggressive Diver-sified Program. Highlights of the flagship Expanded Diversified Program (known as Davco) include a net compounded annual rate of return of almost 13 percent over the past 15 years; only two down years in the last 15; and low historical cor-relation to traditional asset classes and other alternative strategies. Highlights of the Aggressive Diversified Program

include a 30 percent compounded rate of annual return over the past 15 years (pro forma assuming a 2 percent management fee and 20 percent incentive fee); only one down year in the last 15; low historical correlation to traditional asset classes and other alternative strategies; and a flexible

fee structure to meet investors’ different liquidity needs and investment goals.

Sunrise said both programs offer fre-quent historical negative correlation with other investment strategies during times of crisis and ‘left tail’ events, as well as robust risk management and a focus on client service.

Markets Media interviewed Jason Gerlach, principal and acting managing director at Sunrise, via e-mail on Sept. 15.

Markets Media: How has performance been this year, and longer-term?

Jason Gerlach: Through mid-September, our Expanded Diversified Program is up about 2 percent net for the year, and our Aggressive Diversified Program is up about 13 percent. While we certainly wish we would have given our investors more return year-to-date, given the various sharp market reversals we’ve seen in 2011 as well as the overall non-directionality of many markets during this calendar year, we’re generally pleased with how our strategies have performed.

Both our flagship Expanded Diversified Pro-gram and our Aggressive Diversified Pro-gram have long track records of delivering alpha with low correlation to other asset

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classes and investment strategies. Specifi-cally, over the past 15 years our Expanded Diversified Program has had an average correlation of about -0.15 to the S&P 500 and our Aggressive Diversified Program has had a correlation of about -0.13.

MM: What is the appeal of your trend-following strategy – is it primarily safety/diversification?

JG: Trend following plays an important role in Sunrise’s trading strategy and both our Expanded Diversified and Aggressive Diversified Programs are certainly trend-following in nature. However, blended in with our proprietary trend-following tech-niques is a range of additional models and trading approaches that we believe allow us to capture many of the benefits of trend following while reducing some of the downside volatility that is typical to many trend-following strategies.

Sunrise firmly believes there are a wide range of investor benefits to our system-atic trading approach. Certainly, a major benefit is diversification. As stated above, our strategies have a very low correlation not only to the performance of the S&P 500, but to a range of other key investment benchmarks including the Barclay’s Capi-tal U.S. Aggregate Bond Index, the FTSE NAREIT U.S. Real Estate Index, and even various hedge fund and long-only com-modity benchmarks. Moreover, historically speaking Sunrise’s correlation to other investments tends to fall into negative ter-ritory during times of economic crisis and left-tail events. Thus, when investors need true portfolio diversification most (e.g. 2008), Sunrise has a strong potential for delivering.

Beyond the powerful diversification ben-efits, Sunrise’s trading strategies offer compelling stand-alone track records of absolute return that have appeal not-withstanding their low correlation to other investments. In addition, Sunrise’s trad-ing strategies are highly liquid and afford investors quick access to their money should they ever need it — Sunrise’s funds offer monthly liquidity, and separately managed accounts can typically allow 48-hour liquidity or better if needed. Sun-rise’s trading strategies also offer inves-tors long/short exposure to a wide range of markets that they otherwise might not access in their portfolios, including a range of global currencies and commodities not typically found in even many more sophis-ticated diversified portfolios. Lastly, man-agers such as Sunrise have always been and continue to be highly regulated by the U.S. Commodity Futures Trading Com-mission and National Futures Association

and thus we can offer investors the secu-rity and comfort they are seeking in the post-2008 environment.

MM: How do you differentiate yourselves from other investment firms that deploy similar strategies?

JG: Certainly there are many skilled sys-tematic trading firms that have a great deal to offer investors. However, Sunrise is unique in several respects that make it worth investors’ strong consideration.

First, Sunrise is in its 31st year of trading cli-ent and proprietary assets across a wide range of global markets, through every conceivable market environment. What many of today’s less experienced trading firms talk about in theory based on simu-lated results and back-testing, Sunrise has done in real time over three decades. We believe this experience makes us uniquely equipped to deal with whatever develop-ments markets may have in store for us in the future. Second, Sunrise has evolved its trading strategy on its own, in San Diego, far off the beaten paths of New York, Lon-don and the like. Additionally, we are not spun off of another hedge fund or a large investment bank, but rather we are a firm conceived and built from the ground up by three independent pioneers of the systematic trading world – Gary Davis, Richard Slaughter, and John Forrest. Accordingly, we trade our own way and historically speaking, our way has proven to be quite different than those of our com-petitors such that even among a group of systematic traders, we offer diversification. Perhaps nothing establishes this point more than our outperformance of many other systematic traders in 2008 and 2009, our underperformance in 2010, and our rela-tive outperformance of others to date in 2011.

Lastly, I think we can be distinguished in that we’ve never adhered to the con-cept that bigger is better; instead, we’ve closely governed our AUM to ensure that we maintain our edge for our investors and continue to have success trading some of the smaller, but very important, traditional commodity markets. As a result, compared with many other traders in our industry, Sunrise currently has ample capacity for growth and the ability to be particularly attentive to investors in a way that perhaps the largest firms in our space cannot.

MM: How have you performed through the market turbulence since early August? JG: While it’s certainly a smaller sample size of trading days than by which we typically like to measure ourselves, from August 1 through September 12, our

Expanded Diversified Strategy is up 2.55% and our Aggressive Diversified Strategy is up 2.01% on a gross basis that excludes fees.

The correlation of the former to the S&P 500 Index over that time period is approxi-mately -0.52, and the correlation of the lat-ter is approximately -0.48. As mentioned earlier, while we certainly wish for stronger positive returns for our investors during this time period, given the sharp reversals and instances of non-directionality we’ve seen in markets in 2011, we’re pleased to be in positive territory for the year and delivering on our goal of providing our investors with low correlation results.

MM: Does Sunrise do better in volatile or calm markets?

JG: In the rare instances where none of the 70+ global markets we trade are “calm” in the sense that they are not moving significantly in either direction, Sunrise will tend to offer little to inves-tors other than a relatively small and flat return stream.

However as history shows, at any given time some markets somewhere tend to be on the move either upward or downward, and when that’s the case, Sunrise has a good opportunity to deliver performance for its investors. When market moves are particularly sharp and particularly smooth (i.e. favorable volatility for Sunrise), Sunrise is often at its best and able to reap signifi-cant returns for investors in fairly short order. Sunrise is more challenged in environments where markets whip back and forth (i.e. unfavorable volatility for Sunrise) in such a way that our strategies are repeatedly lured into markets only to be repeatedly knocked out over fairly short time frames.

This year has seen an uneven blend of both favorable and unfavorable volatility across markets, and thus while we’re profit-able year-to-date, in 2011 we have yet to produce the more outsized returns we seek for our investors. Hopefully “good” volatil-ity will prevail during the remainder of 2011.

MM: Sunrise has a longer-term holding period compared with industry standards. What is the rationale for this?JG: Sunrise does indeed tend to the longer-term side of the trading spec-trum. As evidence of this, look no further than the fact that our average winning trade is held approximately 85 days in our Expanded Diversified Program, and approximately 175 days in our Aggressive Diversified Program.

There is no specific rationale for these

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results nor do we target specific holding periods. Instead, these longer holding peri-ods are most likely a function of our core philosophy that the markets tend to peri-odically show extended periods of price momentum, and the best approach to trading this phenomenon is by using a sys-tematic approach in which losing trades are exited relatively quickly and winning trades held onto as long as feasible given limited investor tolerance for volatility. Our trading models are quantitative manifesta-tions of our philosophy, thus it is not surpris-ing that our trading results skew toward the longer-term holding periods.

MM: Are you increasing assets under management and/or staff?JG: Yes and yes. Despite the challenging

economic environment and the many factors working against asset managers’ ability to raise money in 2011, we have seen inflows of over $100M into our strat-egies over the last several months and expect to see additional flows through-out the rest of 2011 and into early 2012. Independent of the favorable asset flows, Sunrise has grown its staff significantly over the past several years and con-tinues to interview top talent in a range of areas including research, trading,

and technology.

MM: How has regulation post-financial crisis and post-Madoff affected your operations?JG: Very little. As discussed, Sunrise has been subject to the strict regulatory requirements of the U.S. CFTC and NFA since the early 1980s, and as an organiza-tion we’re quite comfortable with all that comes with a strict regulatory environ-ment. We were recently informed of our passing of our 2011 CFTC/NFA audit and we look forward to continuing our tradi-tion of strict regulatory compliance for years to come.

That said, we are closely monitoring the changing regulatory landscape for alter-

native investment firms such as Sunrise and in the beginning stages of a potential joint registration with the Securities and Exchange Commission because even though it is not presently required, it may ultimately be in the best interests of current and future investors for us to take this addi-tional regulatory step.

MM: Are you seeing increased costs for infrastructure and compliance?

JG: Sunrise has not seen unduly sharp cost increases in the past several years

but certainly, today’s competitive busi-ness environment requires that invest-ment managers such as Sunrise present a more robust business and compli-ance infrastructure than they ever have before. This phenomenon, combined with Sunrise’s tradition of continually striving to get better in all aspects of our business, has led us to recently relocate to a larger, better-equipped business headquarters, significantly upgrade and expand our information technology infra-structures, and make several key hires that will allow us to build our business and continue to improve the processes used to both develop and execute our trading strategies.

MM: What vendors do you use for trading technology, order management systems and the like?JG: We are blessed to have longstand-ing relationships with a range of top ser-vice providers across all aspects of our business including JPMorgan, Newedge, and others. The software tools we use for research, trading and order man-agement have all been developed in-house. We believe this gives us a competitive advantage in that we are able to develop tools tailored to the specific needs of our business and we thus have more flexibility as our trading systems evolve.

MM: Any thoughts on where the markets you invest in are headed?

JG: As systematic traders who largely respond to the opportunities offered by markets as opposed to trading based upon what we think markets might do in the future, Sunrise has little to offer in terms of predictions. However, we can say that our systems tell us that as of mid-September, the current trading environ-ment is a relatively low-risk environment for our trading strategies and that should more robust and steady price move-ments emerge across many the markets we trade in Q4 2011, we can expect to take significant positions and poise our investors for a period of potentially strong returns.

FOR MORE INFORMATION about Sunrise Capital Partners, please contact either Marty Ehrlich or Matt Waz at info@sunrisecapital.com, (877) 456-8911, or visit www.sunrisecapital.com.

Past performance results are not necessarily indicative of future results. An investment with Sunrise is speculative, involves a substantial risk of loss, and is not suitable for all investors. Any person subscribing for an investment with Sunrise must be able to bear the risks set forth in Sunrise’s offering materials.