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Oct 6, 2021

In this episode of Alternative Investments Spotlight, Elana Margulies-Snyderman, Senior Manager, Publications, EisnerAmper, speaks with Ricardo Cortez, Co-CEO of Broadmark Asset Management, an $1.4 billion San Francisco-based tactical investment manager which manages long/short strategies. He shares with us his background of how he got into investing, his outlook for the hedge fund industry, including the greatest opportunities and challenges, and how he is championing DEI on both a firm-level and throughout the alternative investments industry as a whole.


elana margulies-snyderman: Hello, and welcome to the EisnerAmper podcast series. I'm your host, Elana Margulies-Snyderman. And with me today is Ricardo Cortez, co CEO of Broadmark Asset Management, a $1.4 billion San Francisco based tactical investment manager, which manages long short strategies. Today, Rick will share with us his background of how he got into investing, his outlook for the hedge fund industry, including the greatest opportunities and challenges and how he is championing DEI on both a firm level and throughout the alternative investment industry as a whole. Hi Rick, thanks for being with me today.ricardo cortez: Thanks for having me Elana.

EMS: Rick, tell us a little about Broadmark and how you got to where you are today.
RC: Sure. Well, Broadmark was founded by our co CEO, Chris Guptill in 1999. And at the core of Broadmark's investment philosophy is equity market risk management. And to manage risk, the Broadmark investment team employs a directional equity long and short strategy. We can be fully invested fully in cash or short, and this contrasts with traditional long short hedge strategies that are generally always hedged, but usually always net long. The Broadmark strategy is designed to more actively manage exposure to the market. And our goal is to provide positive risk adjusted returns in any market environment. In the firm's first decade, the strategy was offered as a limited partnership, we were a hedge fund. But in 2008, when we had positive returns, many of our clients were fund to funds.

And as you know, fund to funds ran into redemptions. Many of these fund to funds redeemed from us since we were highly liquid. As a result, we saw a decline in assets in a year where we had some of our best relative performance ever. We therefore decided to redirect and diversify our business, expanding into the retail sector. We began to offer our strategies through the wealth management brokerage house and bank platforms. And this has been highly successful and these platforms represent the majority of our business at present.
EMS: And Rick, more specifically, what is your outlook for alternative investments? And more specifically, like I said, long short investing?
RC:Elana, I'm very optimistic about both alternatives and particularly long short investing. And the reason that I'm so optimistic is that we are at a seminal moment in the economic and business cycle in our opinion. We've seen a robust recovery in the economy over the last 18 months, fueled by low interest rates and expansive fiscal policy. But we also have record levels of global and US debt, elevated equity valuations that by some measures rival the dotcom bubble and even 1929, and continuing disruptions due to the COVID 19 pandemic and Delta variant. We therefore believe that we are entering a period in the economic and business cycle where there may be substantial risk in equity prices. Buy and hold and passive investment strategies have been very successful during this most recent full market at capturing solid returns. But these strategies will unfortunately likely suffer the full brunt of losses during a prolonged stock market correction or a bear market.

And after a decade of rising crisis, with a brief interruption during the 2020 pandemic decline, many investors may not fully understand the risks they are taking in their buy and hold and passive investments. In our opinion, an allocation to alternatives, which generally have a low correlation to the equity and bond markets, can provide competitive, non-correlated returns when the equity or fixed income markets are under pressure. Broadmark's approach uses long and short positions. But as I mentioned before, we differ from the usual long short strategy in that our strategy is more directional. That is, we are not always hedged. We can be fully invested, fully in cash or short. We believe that the risk averse strategy can complement both passive and other long short strategies.

And it can be a prudent way for an investor to plan for potential future stock market losses or shocks. Let's not forget that the average bear market decline since 1960 has resulted in stock market losses of approximately 30%. And there have been 15 bear markets in the last 60 years with a bear market defined as a market decline of 20% or more, or one every four years on average. The last two major bear markets resulted in losses of 50% for the major market averages. The question is not if a bear market will happen, but when?
EMS:And Rick, where do you see the greatest opportunities looking forward and why?
RC:Well, I believe that the greatest opportunities are in those strategies which have a low correlation to the equity and bond markets. We believe long short strategies are perfect for potentially lowering risk in the equity markets. But I also would add that investors should consider strategies which protect investors from bond losses when interest rates rise. And in the past, commodities and gold have offered good diversification. And while our firm's skillset is in the tactical long short area, the cryptocurrency and blockchain areas may represent a new way to diversify portfolios away from traditional investments. These newer investments may develop into an entirely new asset class and serve as a complement to investor portfolios in the future.
EMS:And on the other hand, Rick, what are the greater challenges you face?
RC:Well, as I said, I'm very optimistic about alternative investments. However, I believe that a big challenge, which last surfaced during the financial crisis of 2008-9 will be the potential illiquidity in alternative portfolios. When interest rates rise and credit spreads widen, liquidity can dry up just at the time that liquidity is most needed, when investors wish to or forced to redeem. An investment manager may be forced to liquidate holdings at what could be unattractive prices. I myself remember that during the financial crisis, many managers could not sell their liquid positions at all. They thought that these positions were liquid, but when push came to shove, some of these positions could not be sold at any price. This in turn can exacerbate the lack of liquidity and elevate volatility in the entire market. And in the equity space, this concern over liquidity applies to private equity, small cap stocks, microcap stocks, and may extend to those ETFs which are not highly liquid.

In the bond market, many fixed income securities have limited liquidity, and it remains to be seen what effect this may have on interest rates and volatility. My partners and I have managed money through the dotcom bubble and the financial crisis and we know what a challenge this can present. We therefore invest in only the ETFs with the greatest liquidity and constantly monitor our exposure to these ETFs to make sure we are not a large part of the daily trading volume. In the event that we go through another decline like 2020, or a flash crash like 2010, or a full blown bear market like 2000 to 2002 or 2008 to 2009, we want to make sure that we can move to the safety of cash and treasury bills at a moments notice.
EMS: Rick, diversity, equity, inclusion been top of mind for the industry. What are you doing to embrace it both at Broadmark and throughout the industry as a whole?
RC: Yes, diversity, equity, inclusion are very important to us at Broadmark. Our firm is a member of the Money Management Institute, the MMI, which has made great strides in reaching out to the DEI community to increase diversity on Wall Street. Laura Hespe, our COO, is a member of MMIs diversity inclusion community. Our head of operations, Michelle da Luz, is herself an Asian Pacific Islander. And both Laura and Michelle have been with Broadmark for more than 17 years. During this time, their roles have grown substantially and they are senior executives with our firm and are shareholders as well. In fact, women make up half the leadership at Broadmark. I participate in the American Corporate Partners USA program, which helps members of the military transition from the military to the private sector. This has been a valuable program, and I'm happy to say that I've been lucky enough to mentor a young US Marine from a minority group who served for eight years in postings around the world. And with a help of ACPUSA and MMI, he's recently accepted a position at Goldman Sachs.
EMS: Rick, what are your future plans for Broadmark?
RC:Well, we're excited about the future. We believe that we can be an essential part of portfolio allocations in the coming years. And the economy will likely go through an economic period of adjustment after this latest post pandemic boom. And this will call for good risk management and allocations to uncorrelated investments. We are also looking forward to once again accepting institutional clients, as well as expanding into the international markets. We've done this in the past and have a good deal of experience and know how in these areas and we are looking forward to the expansion of our business.
EMS:Rick, you provided a lot of great insight today. I just wanted to see if you have any final thoughts you would like to share with us today?
RC:Yes. My final thoughts are that Steve Jobs once said that passion, persistence and hard work are important, but the most important factor in success is your purpose, or your vision as he put it. And I believe that my purpose or vision, which is shared by all of my partners at Broadmark, is to help investors protect their capital during adverse market conditions while achieving a reasonable long term return. For many years, I've studied the historical cycles of the economic and financial markets, particularly the booms and busts, times when the really got hurt, like the depression and the financial crisis of 2008. And during these times, even the strongest companies crumbled.

So my examination was not only predicated on how to navigate volatile markets, but how to manage and adapt to crises. This requires a knowledge of many things, of history, economics, psychology, politics, social studies, statistics, game theory, history, mathematics, as well as a profound knowledge of the traditional finance. But this type of macro analysis in my opinion is absolutely essential as the stock market becomes increasingly risky as a result of the disruptions from the COVID 19 pandemic, the enormous debt levels of the US and globally, and intense speculation and overvaluation. And finally, my career gratification can also be credited in part to my partner and the firm's founder, Chris Guptill. He created the systematic strategy that we use, which allows us to best serve our clients.
EMS:Rick, thanks so much for sharing your perspective with our listeners.
RC:Thanks for having me Elana.
EMS: And thank you for listening to the EisnerAmper podcast series. Visit for more information on this and a host of other topics and join us for our next EisnerAmper podcast when we get down to business.

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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