Traditionally, the investment advisory industry has recommended two main types of investments for client portfolios, equity (stocks) and fixed income (bonds). In most environments, high quality fixed income investments carry lower risk (as measured by price volatility) than high quality equity investments. To make a portfolio more conservative and less risky, a higher percentage of bonds is recommended, and to make it more aggressive, a higher percentage of stocks is recommended. A third category of investments has risen to increasing prominence over the past 20 years or so, going by the name of specialty fund or alternative investments. The category of specialty funds that we find most compelling at Meritas are those that seek to mitigate or decrease risk while generating additional returns per unit of risk that they are taking. Long/short funds are one example of specialty investments. Many specialty fund types appear first in the private markets, as opposed to being available on public exchanges with daily liquidity like mutual funds are. Increasingly, specialty funds are being offered in the public markets in mutual fund form, with more regulation and transparency than those available in the private markets. Meritas often includes public specialty funds in suggested portfolios for two reasons. First, we believe they offer important diversification benefits to clients’ portfolios. In addition, we believe that the best funds offer an opportunity to increase the returns generated for each unit of risk they take. For example, one of our favorite public long short funds has generated 5 year compound annual returns of 10.27%, with a standard deviation (risk measurement) of 12.69 as of April 30, 2013. Over that same 5 year time frame, the S&P 500 generated compound annual returns of 6.05%, with a standard deviation of 18.83. This means that not only did the long short fund generate greater returns than the index, they did so with lower volatility and less risk than the index.