Rady Assets

Q4 2009 - Annual Letter to Partners

Dear Partner,
We are pleased with our 2009 performance. The Rady Opportunistic Fund returned 32.46% and the Contrarian Long Short portfolio returned 14.61%.

Description                                       2009                   2008
Contrarian Long/Short, LP            14.61%            -12.85%
Rady Opportunistic Long-Only      32.46%            -23.14%
Standard and Poor's 500 Index     26.47%           -37.00%

The year began with investors unable to escape the gravitational pull of the economic black hole of 2008. As the year progressed, a number of the government stimulus plans began to gain traction as hundreds of billions of federal dollars flooded the markets. This enormous amount of liquidity provided investors with a backstop/safety net that gave them increasing confidence to raise their appetite for risk. The second half of 2009 can well be characterized by "The Risk Rally"; the riskiest, lowest quality stocks appreciated the most.

It was interesting to observe the transition of investor sentiment that occurred after the March lows. During the first quarter of 2009 investors felt as if the world was coming apart at the seams and the appetite for risk had almost completely disappeared. Then, as the Fed continued pouring liquidity into the market, investor confidence was buoyed as they took more risk, thus adding fuel to this rally.

While we are relieved that a global economic depression seems to have been averted, we are not entirely convinced that it is smooth sailing from here. In recent quarters corporate profitability has largely been driven by the availability of cheap money and severe cost cutting measures. High unemployment and underemployment, stricter consumer credit, the battered housing market and a more cautious consumer will continue to pose challenges to companies in their quest for revenue growth. As the Federal Reserve liquidity programs begin to be reined in, companies may struggle to meet the now higher Wall Street expectations. Therefore, we feel it is our responsibility to be as diligent as ever and not become complacent. We continue to take on appropriate levels of risk and only increase exposure when we believe that we are being adequately compensated for it.

We firmly believe that the best offense for 2010 will be largely driven by a laser focused defense. When looking back at 2009 it is very important to realize that junk is what led this rally, which is not the type of companies that RAM typically focuses on or invests in. We have always placed the greatest emphasis on dominant/best in class companies, with strong balance sheets, and great management teams. During this "Risk Rally" many of these high quality companies underperformed lower quality companies

We are not willing to compromise our strategy or investment philosophy to participate in this type of rally and will continue to stick to our knitting of investing in high quality companies. We are getting more and more excited about the opportunities we see unfolding on the short side. Many of these lower quality companies have now rallied, in many cases more than two standard deviations beyond their historical valuation multiples. We therefore believe that it is becoming increasingly likely that, as 2010 progresses, the markets will become increasingly volatile. This means that our diligent focus on risk management will become increasingly vital.

We continue to see opportunity in certain segments of healthcare and have been increasing our exposure to Utilities. Utilities have been left for dead, but provide the benefit of extremely resilient business models and solid dividend yields which provides income while we wait for the stocks to recover (click here for our recent CNBC appearance regarding Utilities)

As we have stated in prior letters our primary goal is risk management. We take this responsibility very seriously and for this reason if the market continues to trade in these very lofty ranges we may underperform. However, as the market begins to focus more on the fundamentals, our investors should benefit from our portfolio holdings, short positions and tactical flexibility.

While we will not be surprised if the current rally continues into 2010, we expect increased volatility and significant sector rotation. We believe that we will be rewarded for owning high quality, best of breed companies, as investors realize that there are consequences to taking on too much risk. Also, we continue to be concerned about the potential for future inflation and have therefore positioned a portion of the portfolio to potentially profit from this.
We don't want to be perceived as being dominated by doom and gloom, especially since we see a great deal of opportunity. You hired us to manage risk and create long term value and the only way we can do that is by constantly watching for potential opportunities while keeping a keen eye out for potential pitfalls.
As many of you may be aware, investors can now track the daily performance of our strategies through our publically traded mutual funds (The Rady Contrarian Long/Short Fund "RADIX" and The Rady Opportunistic Value Fund "ROVIX".) In addition, lower minimums are also available with these vehicles.
As Warren Buffett says, "You don't know who's swimming naked until the tide goes out". Well, the water was extremely cold as the tide went out in 2008 and too many investment managers were left exposed with only their tiny excuses.

We are very excited about the outlook for both of our portfolios and look forward to 2010 and beyond.

As always, we thank you for your continued support.

Sincerely,

Rady Asset Management, LLC Harry Rady-CIO

Jordan Greenhouse-COO
Ramu Singh-Director of Research