Just the other day, we were saying that the idea that small hedge funds are barely making ends meet is kind of delusional. As it happens, we have a $60 million hedge fund (as of Nov 2013) that is beating the high watermark with careless ease. Maglan Capital has gathered a 47.28% return for the year so far after adding a 5.3% gain in November.
Maglan Capital: Highest return since inception
As per a survey conducted by Citi, hedge funds with less than $300 million under management would narrowly cover their expenses from the 2% management fee they charge, due to the high compliance costs these days. Despite these destitute circumstances, small hedge funds are surviving very well as we have witnessed in many cases. Take the example of Maglan Capital, the event-driven distressed asset investor, which has outperformed the 29% return on the S&P 500 and has topped the +41% return it generated in FY2012. Considering all this, Maglan is looking at the juicy 20% performance fee, so big profits are coming for the co-founders, Steven Azarbad and David Tawil. The fund was down 34.8% in 2011, the year it was founded.
Maglan owns 6-12 core positions which make up 80% of its AuM, on average the fund's holding period is 12-24 months. The top holdings of Maglan are FairPoint Communications Inc (NASDAQ:FRP), MGM Studios and SUPERVALU INC. (NYSE:SVU).
Maglan Capital: Blockbuster assets
The fund discusses two of its non-core long positions in the monthly letter seen by ValueWalk. Maglan bought a position in Madalena Energy Inc (CVE:MVN) and Globalstar, Inc. (OTCMKTS:GSAT). Azarbad and Tawil discuss how in these times of market highs, there are still many undervalued stocks.
Madalena Energy Inc (CVE:MVN) (OTCMKTS:MDLNF)'s horizontal drilling projects allow it to trade at a premium to its Canadian peers. The oil and gas explorer is looking at higher production from its horizontal wells which is already happening. Maglan Capital points out that the 135,000 acres the company owns in Argentina's richest oil basin, Neuquen Basin, is the blockbuster asset of Madalena Energy. At the company's current valuation, the Argentine assets are being valued at $500/acre only whereas transaction in the Neuquen Basin have valued the land at $7,500-10,000 per acre. Maglan notes that even at $5000/acre, $2/share would be added to the company's share price, which would bring a 500% increase to its market cap.
Globalstar provides communications services in remote areas where traditional wireless carriers are not available. Maglan thinks that Globalstar's satellite spectrum licenses are its blockbuster assets. The founders explain that Globalstar can use the spectrum to offer a licensed and proprietary WiFi which will be of superior quality. Such an offering would beat the existing poor-quality and high interference options.
This unique product could make Globalstar a lucrative acquisition target for companies and will also be very useful for companies like Google, Netflix and Amazon which require high-speed network access. Maglan Capital sees a $4-$5/share upside in Globalstar over the next 12 months.
Note: The article mentioned $100 milllion as the fund's AuM till May 2013, the information was corrected to $60 million as of Nov 2013.