Waterstone Market Neutral Fund gained 2.1 percent in August in the middle of an all-round bad month for hedge funds, according to a monthly update from the hedge fund that was obtained by ValueWalk. The fund uses a convertible arbitrage strategy, and according to the latest numbers from HSBC Hedge Weekly, Waterstone slipped 3.3 percent this month through September 13, and returns are down 13.7 percent YTD.

Waterstone Gains In Supervalu

Speaking of August only, the best performer for the fund was its short position in SUPERVALU INC. (NYSE:SVU). This is exactly the opposite of what happened with the fund in July when Supervalu short was its worst performer. Other than this position, most of the themes that did not perform well for the fund in July reversed in last month. Waterstone also gained from its short in First Bancorp (NYSE:FBP), hedged against long in Doral Financial. The fund was also up 0.25 percent in short positions in Fannie Ma e/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

AMR bonds sold off and Waterstone pared back the position

Waterstone lost from the liquidations of American Airlines as its merger with U.S. Airways Group Inc (NYSE:LCC) has fallen into uncertainty. The U.S Department of Justice sued to block the merger of U.S. Airways and American Airlines on August 14, as a result the AMR bonds sold off and Waterstone pared back the position. The fund still thinks that the position can turn a profit even if the merger does not follow through.

Waterstone continued to lose in short Chesapeake

Waterstone continued to lose in short Chesapeake Energy Corporation (NYSE:CHK) against long in Devon Energy Corp (NYSE:DVN). The shares of Chesapeake rallied in response to the dismissal of the CEO, after Aubrey McClendon left the company. The fund shared its views on Dendreon Corporation (NASDAQ:DNDN) in the monthly letter where it has a long in convertible bonds.

The fund points out that Dendreon Corporation (NASDAQ:DNDN) has not cut costs and sales have declined. The fund is currently in talks with Dendreon over exchange of part of the bond issue.Waterstone thinks that the value of the Dendreon’s flagship drug is worth more than its debt.