**ADR.** American Depositary Receipt. An ADR is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes.

**Alpha (0%).** A risk-adjusted, annualized performance measure relative to a strategy’s or fund’s benchmark, and represents the part of the return due to active management (as opposed to the part of the return due to beta). It is calculated by subtracting beta multiplied by benchmark return from strategy or fund return, and assumes a risk-free rate of zero. A positive (negative) alpha indicates stronger (poorer) strategy or fund performance than predicated by the strategy’s or fund’s level of risk measured by beta.

**AUM. ** Assets Under Management.

**Beta. **A measure of the volatility of a strategy or fund relative to its benchmark index, and represents the tendency of a strategy or fund to respond to swings in the market. It is calculated using regression analysis by dividing the covariance of the strategy’s or fund’s monthly returns and the benchmark’s returns by the variance of the benchmark’s returns. A beta greater (less) than 1 is more (less) volatile than the index.

**Calmar.** A measure of risk-adjusted return, and is the ratio of the average annual rate of return over the last 36 months divided by the largest drawdown over the last 36 months.

**Correlation.** A measure of the degree in which a strategy or fund moves in relation to the benchmark. As opposed to beta, which measures both direction and degree, correlations simply measures direction.

**Dispersion.** Dispersion is a statistical term describing the size of the range of values expected for a particular variable. It is often interpreted as a measure of the degree of uncertainty, and thus risk, associated with a particular security or investment portfolio. For example, the familiar risk measurement, beta, measures the dispersion of a security’s returns relative to a particular benchmark or market index. If the dispersion is greater than that of the benchmark, then the instrument is thought to be riskier than the benchmark. If the dispersion is less, then it is thought to be less risky than the benchmark.

**Downside Capture.** A ratio that shows how the strategy or fund performed in months when the benchmark was negative. It is calculated by taking the strategy’s or fund’s average monthly return when the benchmark had losses, and dividing it by the benchmark’s average monthly return in those months. A negative downside capture ratio means the strategy or fund made money in the months the benchmark had a loss.

**Drawdown.** The peak-to-trough decline during a specific recorded period.

**EBITDA. **Stands for earnings before interest, taxes, depreciation and amortization. EBITDA is one indicator of a company’s financial performance and is used as a proxy for the earning potential of a business. Further, EBITDA strips out the cost of debt capital and its tax effects by adding back interest and taxes to earnings.

**ETF.** An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets such as an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange, and experiences price changes throughout the day as it is bought and sold.

**Excess Return.** The annualized return of the strategy or fund minus the annualized benchmark return.

**Hedge.** An investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract or inverse ETF.

**HFRX Equity Hedge Index.** Strategies that maintain positions both long and short in primarily equity and equity derivative securities. HFRX Indices utilize state-of-the-art quantitative techniques and analysis; multi-level screening, cluster analysis, Monte-Carlo simulations and optimization techniques ensure that each Index is a pure representation of its corresponding investment focus.

**Information Ratio.** Excess Return divided by the Tracking Error.

**KCM.** Kerns Capital Management.

**Kurtosis. **The peak of the bell curve distribution of monthly returns. A larger peak (higher kurtosis) than the benchmark indicates fatter tails and the greater chance of extreme outcomes compared to the benchmark. A smaller peak (lower kurtosis) than the benchmark indicates less fat tail risk than the benchmark.

**Length of Recovery.** The number of months the strategy, fund or benchmark took to get back to break-even after its max drawdown.

**Load. **A load fund is a mutual fund that comes with a sales charge or commission. The fund investor pays the load, which goes to compensate a sales intermediary, such as a broker, financial planner or investment advisor, for his time and expertise in selecting an appropriate fund for the investor. The load is either paid up front at the time of purchase, or a front-end load; when the shares are sold, or a back-end load; or as long as the fund is held by the investor, or level-load. The KCM Macro Trends Fund is a no-load fund.

**Long.** The buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value.

**Long/Short (long-bias).** An investing strategy of taking long positions in stocks that are expected to appreciate, and short positions in stocks that are expected to decline. A long/short equity strategy seeks to minimize market exposure, while profiting from stock gains in the long positions and price declines in the short positions. A long-bias fund maintains a differing ratio of long positions (compared to short positions) that usually exceeds 40% in order to benefit during rising markets.

**Market ****Liquidity.** Refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are relatively illiquid.

**Max Drawdown. **The largest percentage peak to trough decline.

**Morningstar, Inc. **All rights reserved. Morningstar is an independent provider of financial information. Morningstar performance rankings are based on total return, without sales charges, relative to all share classes of mutual funds with similar objectives.

**Quant Fund.** An investment fund that selects securities based on quantitative analysis. In a quant fund, the managers build computer-based models to determine whether an investment is attractive.

**Relative Volatility.** Compares a fund’s volatility to a benchmark index. A relative volatility greater (less) than 1 means the fund’s returns have been more (less) variable.

**Risk-Free Rate. **The theoretical rate of return on an investment with zero risk. Zero risk does not exist, so three-month treasury bills are often used as a proxy.

**R-Squared.** Measures how a fund’s performance correlates with a benchmark index’s performance and shows what portion of it can be explained by the performance of the overall market/index. R-Squared ranges from 0, meaning no correlation, to 1, meaning perfect correlation. An R-Squared value of less than 0.5 indicates that annualized alpha and beta are not reliable performance statistics.

**S&P 500.** An unmanaged composite of 500 large capitalization companies. The S&P 500 index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index.

**Sharpe Ratio (0%).** A risk-adjusted measure calculated using standard deviation and excess return to determine reward per unit of risk, and assumes a 0% risk-free rate for simplicity. The higher the ratio, the better the fund’s return per unit of risk.

**Short.** A sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume they will be able to buy the stock at a lower amount than the price at which they sold short.

**Skewness. **Measures the shape of the bell curve distribution of monthly returns. Negative skew indicates the most common return range (mode) exceeds the median and mean return ranges. The “top of the bell curve” is to the right of center. The opposite is true for positive skew, where the most common return range (mode) is smaller than the median and mean return ranges. The “top of the bell curve” is to the left of center.

**Sortino (0%). **Measures risk-adjusted returns, and is the ratio between annualized return divided by annualized standard deviation calculated from losing months only. It assumes a 0% risk-free rate.

**Standard Deviation.** Refers to the volatility or variance of monthly returns. Monthly standard deviation is annualized by multiplying it by the square root of 12. The greater the standard deviation, the greater the fund’s volatility.

**Style Maps.** An estimate of characteristics of a fund’s equity holdings over two dimensions: market capitalization and valuation. The percentage of fund assets represented by these holdings is indicated beside each Style Map. The position of the most recent publicly released full holdings is denoted on the Style Map with a dot. Historical Style Map characteristics are calculated for the shorter of either the past three years or the life of the fund, and are represented by the shading of the box(es) previously occupied by the dot.

**Tail Risk.** A form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution. Tail risks include events that have a small probability of occurring and occur at the ends of a normal distribution curve.

**Top-Down, Macro Trends Analysis. **An investment approach that involves looking at the overall picture of the economy and breaking down the various components into finer details. After looking at the big-picture conditions around the world, analysts examine different industrial sectors to select those that are forecast to outperform the market. From this point, they further analyze stocks of specific companies to choose potentially successful ones as investments. Macro refers to a large scale trend.

**Tracking Error. **Measures the standard deviation or volatility of the annual excess returns.

**TTM.** Trailing Twelve Months.

**Turnover Rate.** The lesser of amounts of purchases or sales of long-term portfolio securities divided by the monthly average value of long-term securities owned by the fund.

**Upside Capture.** A ratio that shows how the strategy or fund performed in months when the benchmark was positive. It is calculated by taking the strategy’s or fund’s average monthly return when the benchmark had gains, and dividing it by the benchmark’s average monthly return in those months.

**USD. **U.S. dollars.

**Valarian™. ** Refers to our branded Separately Managed Account (“SMA”) solutions built for registered investment advisors, institutions and other qualified purchasers.

**VAMI. **Value Added Monthly Index. The VAMI tracks the monthly compound growth of a hypothetical $1,000 investment.

**Volatility.** A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. Commonly, the higher the volatility, the riskier the security. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

**Whipsaw.** A condition in which a security’s price heads in one direction, but is followed quickly by a movement in the opposite direction. A trader is considered to be “whipsawed” when the price of a security he just invested in abruptly moves in the opposite direction of what was expected.

**YTD. **Year-to-date.