Patton Fund Management Inc

The Strategy invests both long and short in U.S. traded equity securities of public companies. Only S&P 500 stock components are considered for the long positions in the Strategy. Short positions are select from a list of approximately 500 stocks that generally rank among the larger market cap, higher priced, and most liquid in the market. Approximately 100 positions exist at all times in the Strategy. The Strategy is built entirely on principles of behavioral finance and is designed to exploit pricing inefficiencies in individual stocks.

The investment objective of the Strategy is to generate positive absolute returns that exhibit low correlations with both equity and fixed-income returns resulting in reduced risk in an investor's total portfolio while at the same time improving long-term returns. Both actual performance as well as extensive research on the strategy suggests these objectives can be met. The Strategy's risk is controlled through diversification, an unwavering adherence to the investment disciplines, and a consistent allocation to both long and short positions. The Strategy is ideally suited as a diversifying component within a total portfolio. The Strategy is expected to be a better diversifier than bonds due to both its higher expected return and low correlation.

While the Strategy was designed and developed entirely by Mr. Patton, the underlying principles are reflected in the emerging academic field of Behavioral Finance, or what practitioners often call investor psychology. Behavioral Finance research has shown that investors tend to repeat particular cognitive errors when making decisions about stock transactions. In other words, investors' decisions are often more a product of emotion than reason. These cognitive errors result in sources of inefficiencies that, by their very nature, tend to persist over time, although never in the same stocks indefinitely. Research by Mr. Patton shows that behavioral-based inefficiencies in the pricing of individual stocks are exploitable during windows of opportunity, while the pricing of the affected stocks generally becomes more efficient in the long term. Mr. Patton's research also shows that these inefficiencies can be exploited, for profit, with the strategy's quantitative, rule-based model that excludes human emotions.

Although Behavioral Finance has become widely accepted as an important school of thought on the stock market, it offers no obvious recipe for trading profits. Instead, Behavioral Finance can be thought of as a general framework for understanding sources of stock market inefficiency. Mr. Patton utilized his experience in managing publicly traded equities, together with his study of Behavioral Finance and his knowledge of statistical modeling to create the purely quantitative Strategy. To accomplish this, Mr. Patton spent four years testing behavioral indicators to determine precisely what has worked as well as what is likely to continue to work. Historical back-testing is especially relevant for evaluating this strategy because the sources of the behavioral-based pricing inefficiencies are likely to persist into the future. His research utilized the most comprehensive and reliable data available, including both the University of Chicago's CRSP U.S. Stock Database and Standard and Poor's Compustat database. These two sources were merged into one proprietary database covering mid-1962 through today.