Waterstone Market Neutral Fund, was able to gain marginally in June during the massive market sell off. The fund was up 0.5% in June, while performance is at -7.7% for the first half of the year. However the upturn in June has not lasted into July, the latest returns that we have seen from the fund show that returns were down-4.6% in July and later were up +0.16% in the first nine days of August, bringing YTD decline to -12.46%.

Waterstone Fannie Mae

Waterstone’s largest position is a short in Fannie Mae/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac/ Federal Home Loan Mortgage Corp (OTCBB:FMCC) which was up +0.99% in the month. Waterstone’s previous letter, which detailed May performance, included a careful approach to its risky short bet in Fannie Mae and Freddie Mac, as their shares have a tendency to trade at very divergent numbers.

Waterstone up against Fannie Mae, Freddie Mac

Given the high volatility in the shares of the mortgage lenders, Waterstone is changing the size of the position with respect to the circumstances. Fannie Mae and Freddie Mac have been losing ground in their preferred and common shares since June, down 38% since then. Waterstone thinks that as both lenders are winding down, following the bipartisan roadmap, there would be no value left in either the equity or preferred shares and government has also given no indication that it will provide any compensation. Waterstone’s thesis seems more sound when put in perspective with the recent news that the GSEs are sitting on billions in losses which are just an accounting change away from being realized.

Waterstone’s bet against FFederal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC)  is risky in the sense that being the largest position of a $1.36 billion fund, it can seriously topple the fund’s standing if it goes south.

Waterstone up in Supervalu short, down in First Bancorp

Other shorts that worked well in June were, SUPERVALU INC. (NYSE:SVU) and Texas Industries, Inc. (NYSE:TXI) while a long in Parr Petroleum Corp (OTCBB:PARR) was also profitable.

The detracting positions in June were shorts in First Bancorp (NYSE:FBP), which is hedge against a bet in preferred shares of Doral Financial Corp. (NYSE:DRL). Longs in Ambac Financial Group, Inc  and (OTCMKTS:ABKFQ) and American Airlines debt were also down in the period.