Page 264

RISK MANAGEMENT

The portfolio managers' own assets are aligned with those of investors, and are invested in highly diversified and liquid vehicles. The portfolio managers are subject to ongoing systematic review. Leverage is rarely used and is viewed as a double-edged sword.

Wilcox emphasizes that gross exposure to the stock market is as important as net exposure because it is sometimes possible to lose money on the long side and short side. Gross exposure is the sum of the long and short exposures, while net exposure is the short exposure taken from the long exposure.

Shorting stock is done to make a profit rather than to hedge. The managers will also hold cash. Occasionally they use paired-securities tactics to create stub values. They may use index and company-specific options to effect short strategies.

DURABLE BASE OF INVESTORS

In addition to managed accounts, there are six funds. Cumberland Partners, which began in 1970, is the flagship fund. The first of the four LongView Partnerships began in 1987. They feature a preferred return to investors of 8 percent annually. Net profits in excess of 8 percent are allocated 80 percent to the investors and 20 percent to the general partner. Cumber International began in 1984. Cumberland Benchmarked Partners began operations in January 2000. The profit allocation is 25 percent of the excess over the market benchmark provided that the partnership is in a positive gain position and ahead of a high-water mark.

In 1999, Cumberland adopted its formal benchmark consisting of the average of the S&P 500 and the Russell 2000. This blended benchmark reflects the characteristics of its portfolio companies. Exceeding this benchmark is part of the goal set for all the funds and an explicit part of the incentive fee for Benchmarked Partners.

In addition to the 10 percent of assets that belongs to current and retired partners, 25 percent of the investors are U.S. nontaxables including endowments and foundations. The offshore component is small. The remainder is high-net-worth investors as well as executives of companies they've researched who have been impressed by them and decided to invest with them.