Loeb King Capital’s Gideon King writes that his simple investing thesis is to remain liquid, use little leverage and be a little long and it has so far done well for the hedge fund. Loeb Arbitrage Fund was up 2.3% in Q3, bringing YTD gains to +6%, according to an investor letter seen by ValueWalk. The fund netted its highest returns from event-driven and arbitrage strategies in the last quarter.
Europe the new frontier
Speaking of event driven profits, Gideon King explains that Loeb’s strategy is going to benefit from the present state of the market, where stock pickers have an edge and choosing the right companies can bring profits. Gideon sees Europe becoming the hot place for activist investors. Loeb Arbitrage is set to gain returns from a number of M&A deals in the European area which were essentially dead in the region after the financial crisis. We are already seeing some tough activists in Europe who are bringing the relatively less known form of investing to the region. The likes of Cevian Capital, an aggressive Anglo-Swedish hedge fund, are rising to the occasion. Just like Gideon King, Bill Ackman also predicted that Europe is sitting on a storm of activist investing, when he spoke at Oxford Business School a few weeks back.
Elliott also buys Celesio
Gideon King points out how his fund’s positions in European countries can turn a profit as they become targets of acquisitions and mergers. Loeb Arbitrage has a stake in Celesio AG (ETR:CLS1)( OTCMKTS:CAKFF), a drugmaker, which is under the eyes of several buyers. It has been reported that McKesson Corporation (NYSE:MCK) is looking to buy Celesio from its majority owner which could push up the returns of the hedge fund. Paul Singer’s Elliott Management has a knack of taking up its position in European companies very close to when tender offers are set to expire.
In the case of Celesio, Elliott Management raised its position to above 10% of the company just yesterday. Mckesson is looking to buy Celesio for 3.9 billion euros, and we won’t be surprised if Loeb Fund partners up with Elliott in holding out and asking for a larger price from McKesson for their piece of Celesio. Elliott recently did the same thing with Kabel Deutschland Holding AG (ETR:KD8) (FRA:KD:8) which was bought by Vodafone Group plc (LON:VOD) (NASDAQ:VOD).
The fund also has a long in SABMiller plc (LON:SAB), which manufactures a wide variety of beverages. Gideon King thinks SABMiller plc (LON:SAB) (OTCMKTS:SBMRY) will be acquired by Anheuser-Busch Inbev SA (NYSE:BUD) (EBR:ABI), a Germany based brewing company. The fund has a short in Anheuser-Busch Inbev.
Gideon King: S&P 500 not a bubble
Gideon King does not think that the market is in a bubble. He points out that the higher P/E valuation on the S&P 500 (INDEXSP:.INX) can be explained by the wide gap between growth and inflation. He says that despite of momentum buying, the case today is not as worse as it was before. King notes that there is not so much “senseless optimism” these days in the equity markets which identifies a bubble. To prove his point, he says that had it been a bubble, Volkswagen AG (ETR:VOW3) (FRA:VOW3) would not be trading at 6x of 2015 estimated revenue. However contrary to equity markets, Gideon finds credit instruments to be closer to saturation and they are reaching bubble-like levels.