Crescat Capital preliminary net performance estimates for the first quarter ended March 31, 2016.

Dear Investor,

Based on the quarter-end numbers for Crescat Capital and the S&P 500, it would seem the stock market was rather calm in the first three months of 2016. However, it was anything but calm. The market started the year down sharply. For most of January, it was the worst decline ever to kick the off the year for US equities. At its recent lows on February 11, the S&P was down 10.3% for the year. January confirmed the bear market environment that we had postulated in our fourth quarter 2015 investment letter. But after the January and February stock market rout, the S&P 500 rallied sharply to finish with a total return of 1.4% for the quarter. In spite of the gyrations, all three Crescat strategies beat the market for the quarter. Global Fiat Currency Debasement was our best performing macro theme across all three strategies driven by our long precious metals positions.

Crescat Capital

To us, the market action in 2015 and 2016 closely resembles that of 2000 and 2001. In each of these environments, sharp declines were quickly offset by nearly-equal rallies. In 2000 and 2001, the back and forth swings masked a stealth bear market that was unfolding that ultimately lead to a convincing breakdown in 2002. If the same pattern plays out, we could continue to see back-and-forth moves in the stock market throughout the year with a downward bias leading to a more convincing breakdown by year end.

Crescat Capital Performance

Crescat remains structurally positioned towards the bear case due to the composite of our macro themes. As evidence of this posture, through February, Crescat’s hedge funds, Global Macro and Long/Short, were up 7.2% and 6.3% respectively while the S&P 500 was down 5.1% thanks predominantly to a variety of short positions as well as long precious metals positions. Crescat Large Cap, our long-only strategy, was also doing well through February, up 1.7%, even in the down market. The strong Large Cap returns were due to a healthy allocation to cash and gold along with other long equities including gold mining stocks, which comprised the best performing industry in the market in Q1.

In hindsight, the rally in late February and March was largely a result of a dovish Janet Yellen tempering the prospects of further Fed interest rate increases, which also caused energy and emerging markets to spike while the dollar weakened. Yellen had a much bigger impact on global markets than we foresaw which hurt the short positions in our hedge funds, even after taking partial profits in them in February and March. Global Macro and Long/Short were down an estimated 5.3% and 3.5% net respectively in March while the S&P 500 was up 6.8%. Crescat Large Cap was up 2.8% net for the month.

For the entire quarter, Crescat Large Cap was the big winner among our three strategies, up an estimated 4.5%. Large Cap posted an estimated 2.8% net gain in March. It is important to note that Crescat Large Cap significantly beat the S&P 500 in the first quarter with substantially less volatility than the index. This was an impressive feat for a long-only strategy in a difficult market.

Three of our short-related themes worked against us in or hedge funds last month: China Currency and Credit Bubble, Aussie Debt Crisis, and New Oil & Gas Resources. A smattering of long-related themes had positive performance in the hedge funds in March but not enough to offset these losses.

We do not take drawdowns in any of our strategies lightly as we have our own money on the line alongside our clients. We strive very hard to protect and grow assets. We cut our risk several times in March in our hedge funds as our short positions were working against us. The March drawdown in Global Macro is within our risk model tolerance. It was at about the 95th percentile level for our targeted level of risk, which means that a monthly drawdown of this size should only happen about 5% of the time. Such a level of risk is key to striving for the 15 to 20% net annualized returns that we seek and have been able to deliver in the last two years with the Global Macro risk model.

We remain committed to our investment process and confident in our themes and positioning. In all of our strategies, we continue to strive for strong absolute returns with low correlation to the markets and to other managers. Our correlation with markets over the last three months has been extremely low due to our bearish macro themes and positions.

March monthly performance reports will be available within the next few weeks. Thank you for your continued confidence in Crescat.

Sincerely,

Crescat Capital