We updated our readers on John Burbank’s performance in his hedge fund Passport Global, when the hedge fund took in a 4.2% gain in Q2 and is up 10% for the year. Passport Capital has $3 billion in assets under management whereas the Global fund manages $1.2 billion.
Passport gains when other hedge funds decline
Passport Capital’s Global fund was among the handful of hedge funds that did not underperform in June—when most global markets lost ground, the fund was up 1.9% in June. The quarterly letter notes that the decline in emerging markets, metals and mining stocks in June was good for the puts that the fund held in related areas. Another reason for the fund’s outperformance in a period when other money managers declined was Passport Global’s reduced exposure to low beta stocks. Seeing the signs of heavy upbidding in defensive and high-dividend paying stocks in April, the fund tracked back its exposure in such holdings, thus saving itself from plummeting losses when stock markets corrected in June.
Passport cover short JPY, Cuts long MXN and mortgage securities
Burbank included a short position in JPY in the first quarter, and wrapped it up in the second quarter. Other funds have also been covering their shorts in yen. Fortress Asia exited the position in Q2 as well. Burbank reduced long exposure in MXN, Mexican peso was under a firestorm of short positions earlier this year, and long positions were exited by speculators all over the place as the peso declined against the dollar. Burbank also profited from shorts in low beta stocks that it felt were over bought.
Other investments that Passport exited were its agency MBS holdings while still holding onto non-agency securities. As we have noted before, mortgage backed securities had a tough run in the last couple months, Passport saved itself from losses in this area by establishing shorts in mortgage REITs in the form of options and equity. This helped the fund to offset the losses it incurred in its mortgage portfolio.
John Burbank bullish on Chinese internet companies
Burbank goes on to describe some growth prospects in China and EMs against a strengthening U.S. economy, which you can view here. Burbank thinks that the best long investment in China is internet companies, as China is not willing to let U.S. based tech giants like Google Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN) grow in its country. In this respect Passport is long on Qihoo 360 Technology Co Ltd (NYSE:QIHU) Passport is shorting companies that are dependent on GDP growth and old tech companies that are not innovating.
Burbank says that the recent market dislocation should be seen as a positive as it has managed to contain the risky trading behaviors of large speculators going forward. He states that the best way to cash in from the market inefficiency these days is by keeping convexity in the portfolio through options, which Passport has built up in its portfolio. Burbank said that the positions that are most at risk are Passport’s shorts in EMs and metals and mining sector. He says that the risks that EMs are exposed to are not fully priced in yet and only further downside will realize the actual underperformance. Passport’s value at risk in EMs is greater than in U.S. after the changes it made in Q2. However Burbank thinks that with respect to equities, the U.S. is the best place to invest. The fund has avoided building up traditional short exposure in U.S. companies with bad business models.
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