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Ian, you began advising clients over 17 years ago and established Naismith Capital Strategies in 1996

With this substantial experience behind you what have you discovered about the skill-sets required to become a successful money manager?

Know how to act disciplined when a trade is not going your way

  No matter if you are trading stocks, bonds, commodities, real estate, currencies, etc
- begin with a predisposed plan of action when the trade is moving against your desired outcome
  There are really effective ways of accomplishing this discipline – whether it be hedging techniques, trailing stop loss orders, selling at predisposed profit targets, etc
  These all are logical and practical, but the meaningful part is pushing the button once a confirmation has sounded
  In addition, when the markets are too volatile for trading, simply sit aside and watch

With Ian Naismith, co-Principal at Sarasota and co-Manager of The Currency Strategies Fund (Ticker: FOREX)

You formed Sarasota Capital Strategies with your business partner Anthony Welch, in 2002

What prompted you to set up the company?

It happened due to a turning point in philosophy and strategy for both of us after the roaring 1990’s

  In the 1990’s, Tony and I bought and sold individual stocks – which was quite easy, given the market conditions
  When I mention “bought,” I do mean we bought on the dips, and when sells occurred, it is because a stock was not “going up fast enough
”  When 2000 came and delivered a bear market for the previous years’ high flyers, buying on dips did not work
  Thus, in the latter part of 2000, and especially starting in the early parts of 2001 and lasting into 2003 – judicious allocations and stop orders became the norm
  During that period, Tony and I decided to concentrate on trading indexes employing technical analysis using relatively new items called ETFs
  We had known each other well since 1992, and since we were in concert with our thoughts, we decided to combine forces
  It is hard to believe the roaring 1990’s was more than a decade ago

What type of investment style does the firm undertake?

We are an absolute return style firm that primarily uses technical analysis with common sense overlays

  Once in a while, unusual occurrences happen that provide opportunities that cannot be possibly measured by a rigid technical model
  A great example, recently the Powershares DB US Dollar Bull ETF (UUP) could not issue new shares
  Within minutes, demand overtook supply and the ETF was trading up 2% while the US Dollar Index was flat
  In less than 2 minutes after this anomaly, we started selling the majority of our 21% position of the ETF to realize a nice gain; that, in a perfect technical world – should not have happened
  By the end of the day, we replaced the sold shares for another fund that was tracking the US Dollar efficiently and wrote covered calls on the small amount of remaining shares of UUP
   On the flipside, fourth quarter of last year, our firm simply hedged through most of the mayhem
  Because of unprecedented volatility, momentum and/or contrarian models did not work, so we chose the boredom of neutrality
  It worked beautifully

Sarasota is the investment advisor for The Strategies Currency Fund, a series of the Northern Lights Fund Trust

What are the investment objectives of this fund?

The main objective is to realize consistent total return with an emphasis on keeping the draw down and volatility to a minimum compared to individual currencies and other asset classes

  Regularly, advisors who have invested in the fund tell us “we don’t have to worry about your fund in our portfolios
”  This is what we’re all about
  Keeping the fund consistently performing is a balancing act between the simultaneous use of non-US Dollar currencies and the US Dollar Index
  We believe using those opposing currency groupings help smooth out the return of the fund
  Historically, in times where non-US Dollar currencies are showing strong trends, we tend to correlate with the trend – and when the US Dollar Index shows a strong trend, we tend to correlate with the trend
  The combination of capturing ranges of return when non-US Dollar currencies are strong, and capturing ranges of return when the US Dollar is strong – gives us consistency

With Ian Naismith, co-Principal at Sarasota and co-Manager of The Currency Strategies Fund (Ticker: FOREX)

What are your main day-to day responsibilities in managing the fund?

We make sure the fund is adhering to the models that were created and keeping our eyes on opportunities that cannot be measured in a technical system

  I’m a system driven person and Tony is an opportunity person – it works out very well
  Early each morning, we know exactly where our exit or entry prices are on a currency by currency basis
  If either limit is breached, we take action
  Once trading begins, we look for intraday irregularities that might become opportunities
  We also make sure that the trades are fairly priced compared to the intrinsic value of the items we are trading
  Besides the trading and monitoring, we do the normal mutual fund type things like prepare written reports, approve expenses, marketing, etc
  Joe Garbade, our operations person, does an incredible job with day to day reporting and compliance

The  Currency Strategies Fund invests primarily in exchange traded products and/or mutual funds, the value of which are tied to currency prices  What do you like about exchange traded products and what advantages do they offer for investors?

The vast majority of the mutual fund clients and audience to the fund are advisors and regional brokers

  Right now, we believe that a fund of funds makes sense because the items we choose to trade do consistently track the prices of the currencies they are designed to replicate
  It is easy for advisors and other professionals to use our fund because most understand how ETFs or mutual funds work, and it is simple for them to track as well
  They can explain the fund it to their clients
  As the fund grows, we will be integrating other tools for trading that will complement our ETF trading, but at the same time, give us more choices, liquidity, and at the same time will reduce overall expenses of the fund
  In other words, we want to use tools that will get us to our goal – and sometimes ETFs are the way to go, and sometimes they are not

You use proprietary technical analysis to determine which currencies you believe will outperform the U

S
Dollar
What tools do you use to assist you with this and what momentum characteristics is the analysis based on?

We are looking for out performance from either side of the pair, whether the winner is the US Dollar or not

  Primarily, we have used Tradestation for building our unusual indicators and auditing of the code is verified by good old-fashioned Microsoft Excel
  Momentum is measured on the ascension on consistency of price, but, we do receive contrarian sells when consistency is compromised and contrarian buys when consistency is re-established
  One beauty of Tradestation is that you can view your indicators in a columnar format that is sortable
  This eliminates the need for 6 different video monitors in the workspace
  We can see more actionable information for trading on one 21” screen than we’ve seen on multiple screens in other offices
  We like it simple
  The hard work has already been done developing the models, thus, the trading signals derived from that hard work is clear and simply displayed for action

What measures determine what initial allocation to a currency you may make  and then whether to increase or decrease it?

This is not mandated by prospectus, but, we use equal weighting due to the overwhelming history that equal weighting enhances performance starting around 3 year rolling period and improves dramatically in longer timeframes

  Equal weighting also smooths out volatility in portfolios
  Thus, we have imposed investment limits on a currency by currency basis
Currently, the maximum investment limit we have for each G-10 currency ex-US Dollar is 7% and 4% for each emerging market currency
  By prospectus, gold has a 10% investment limit
  However, by prospectus, the US Dollar index can receive 100% allocation if it is in a raging bull market or is having a sharp rally because we would like to participate in those events as much as possible
  It would be rare for us to be completely out of the US Dollar Index or 100% in the US Dollar Index
  We can also expose the fund to 100% short term safe havens in times that excess volatility is occurring
  The increasing or decreasing of each position happens when we receive a signal from our model
  The adjustments are incremental to reduce the amount of noise trading when volatility is occurring

With Ian Naismith, co-Principal at Sarasota and co-Manager of The Currency Strategies Fund (Ticker: FOREX)

What key steps do you take to mitigate the various types of risk associated with your investment style?

By nature, the inclusion of all types of currencies including the G-10, emerging markets, gold, and US Dollar Index gives us an actively managed single solution palette that advisors cannot find in the United States right now

  The fact that we are not strictly an anti-US Dollar play only helps mitigate risk
  In addition to the currency choices, the allocation limits, predisposed stop loss triggers, hedging techniques, covered call writing, and the ability to retreat to 100% safe havens gives us many levels of insulation in nasty markets

Do you expect to see significant growth in currencies being packaged in the form of new exchange traded products and what shape might these take?

Well, we don’t see much more need for duplication of single G-10 or really liquid single emerging market currencies

  However, we believe the market may see many baskets of various currencies
  Wisdomtree has many currency baskets that have been in registration for quite some time
  Of course, it will take demand from advisors and investors to make currency ETFs successful

What's the average length of time that you hold your positions for?

We don’t limit ourselves to time holding periods

  When we receive a signal or see an opportunity – we act
  Some of the biggest mistakes made by advisors are adhering to a predisposed time period
  What advisors should be adhering to are price periods – meaning, if the price of an item reflects a trade that is capturing positive return with acceptable amounts of volatility, then it makes sense to participate whether the time is a week, month, or year
  In volatile markets, our holding periods are compressed
  In streamlined markets, our holding periods are extended
  We would rather have more turnover with less volatility and draw down, than little turnover with more volatility and draw down

Risk Management, design and back testing of strategies and optimising trade execution  are just some of the areas where trading tools and technology are now making a significant impact on how many firms trade currencies

How important is trading technology to your own team and in what ways does it help you maximise trading operations?

Trading technology is everything to us

  It is imperative that we understand the past before starting a trading system using real money, so, we make as many mistakes as possible in the backtesting world
  It requires numerous hours of studying what algorithms – based on history - increase chances for consistent, repeatable results and at the same time, we defer that the future may be a totally different road than the past
  With that said, having smart trading habits improve total return
  This means finding patterns intraday for buying or selling to improve overall cost
  It also means not overpaying or underselling in relationship to intrinsic value
  We have the technology to monitor these items in real time
  However, technology means nothing if you do not translate the technology into action
  The amount of money saved due to our trading diligence is astounding

With Ian Naismith, co-Principal at Sarasota and co-Manager of The Currency Strategies Fund (Ticker: FOREX)

Is your trading technology infrastructure built in-house or provided by specialist vendors?

The trading technology is provided by specialist vendors

  For real time tracking of intrinsic value, volume and bid-ask spreads/sizes, we use Tradestation
  The intraday trading algorithms were also built in Tradestation
  We use HydraTrade for executing the trades
  So we have Tradestation on one screen and HydraTrade on the other
  It is very simple
   In addition, all of this is easily portable
  When Tony and I travel, it is almost seamless to trade
  As a backup, we can call the head trader at our clearing firm, Ceros Financial Services, for trading purposes
  We have a long term relationship with the folks at Ceros, and we know we can count on them
  If we need to search for liquidity for buying or selling ETFs with shallow volume and/or large bid-ask spreads, we can rely on WallachBeth to find the liquidity
  So, a combination of machine and human resources is the way to go

Do you plan on utilising any algorithmic trading techniques or are you already applying them?

We are already applying algorithmic techniques – however, the trades are being done by humans, not automated computer only trades

  It is algorithms that dictate what currencies we’re in, the allocation of each, and how we trade in and out of the currencies intraday

In the future, where are you going to be looking to grow your business and search for new and innovative ways to utilize your investing expertise?

Much like we have already

  A)
Identify gaps in the investment landscape; B)
  do homework and build intelligent models that advisors can use and not lose sleep; C)
  create and launch the product;  D)
  educate and convince the advisory community to fill the gaps that exists in their portfolios
  The beauty of this job is that there are still many opportunities in the investment landscape and we would like to have a stable of products that fill those gaps
  They may come in a number of forms, but the intent is to provide value to the investor