Balyasny Asset Management ended the year with double digit positive returns in all three of its strategies, according to an investor letter reviewed by ValueWalk.
Atlas Global generated the lowest returns of the group, up 13.11% on the year. The AEF fund generated 21.14% and the AIF fund returned 15.14% for the year. All yearly returns more than doubled the fund’s 2012 performance.
In the 4th quarter, Atlas Global positive returns in Equities, Macro, and Credit, according to the investor letter, noting that a positive skew in win percentage was a key factor. “The outstanding performance (was due) to one of the best positive skews (winners vs. losers) that we have seen in some time.” In addition to long term positions, the fund added positions such as Google Inc (NASDAQ:GOOG) (in our TMT portfolio) and NuStar Energy L.P. (NYSE:NS) Energy (in Utilities). “Our Macro portfolios did well in FX and equity futures. Credit made money in a variety of core, fundamental corporate bond and CDS positions – particularly in monoline insurance and gaming.”
Balyasny’s gross returns improve, volatility drops as diversification kicks in
Inside the numbers, Balyasny management noted shifts in risk management exposure, as they hit their respective volatility targets of 5% and 8% and kept their net exposure levels near the 10% level. “Performance attribution was much more balanced than in previous years, reflecting progress in our recruiting and development initiatives to diversify returns,” the letter said. The letter noted that 50% of the top ten performers were from the prior year, with industrial equities the best performer with 19% of total returns.
While the average return on equity was similar between 2013 and 2012, the lack of correlation between certain investments and individual stock picking contributed to the fund’s relative success. Considering strategies, the letter noted the long / short equity strategy “represented over 70% of our overall P/L in 2013 with 88% from stock specific alpha.” Top performing equity strategies for 2013 were Industrials, TMT, and Utilities. “The average equity PM ran approximately 80% stock specific risk in their portfolio, which was at our target,” the letter said. “Running higher stock specific risk is important because it improves the quality of our returns and lowers our volatility at the PM level.”
In terms of allocation, “Macro represented approximately 15% of our overall returns in 2013 with similar returns on capital to equities. Of the nine macro books, all but one generated positive P/L. Credit had an excellent year with very strong returns on capital and solid alpha on longs and shorts.”
Balyasny finds opportunity in industrials
In regards to individual stocks, it was an industrial, Oak Brook, IL-based manufacturer Chicago Bridge and Iron that was among the leaders of the charge. Two of the largest profit generates, which were profiled in the fund’s Q1 2013 letter, were Chicago Bridge & Iron Company N.V. (NYSE:CBI) and Penn National Gaming, Inc (NASDAQ:PENN). “We think the quality of the earnings and their predictability going forward is much stronger than the company’s peer group. In three years, we model them to be debt free again… If they continue to execute, their balance sheet will improve, they will start to buy back stock and raise the dividend, and we could see the stock trading up from the current $80 range to $120 over the next 12 to 18 months.”
The fund expects weakness to come out of Japan in 2014, after strong returns in 2013 in the sector. “Our exposure to Japan is another solid example of our ability to take advantage of shifting market and fundamental conditions,” the letter said. The fund expects growth to slow due to a consumption tax and the lack of Bank of Japan acting proactively. The fund is expecting that USD / JPY currency pair to be lower. “One of our conclusions from this is the longer the BOJ waits, the easier it will be for USDJPY to slip lower. In many ways both JPY and the Nikkei need higher US rates in order to begin moving again. Our view is that higher rates trades are better uses of capital at this time.”
Balyasny’s long short exposure
What is interesting about Balyasny is its long short exposure has remained reasonably balanced, as illustrated by the chart above. “Since market correlations topped in the summer of 2012, we have been focused on keeping our gross exposures within our target range,” the letter noted.
Going forward the fund is positive on its relative value strategy and stock picking, but less so on market direction. “Our PMs are finding the current opportunity set to be quite robust,” the letter noted. “In a market that we expect will be less dominated by multiple expansion and 30% equity returns our own internal expectations for continued strong performance remain high. We are already seeing this as we enter 2014 as the markets are trading with a much more balanced (and fundamental) tone.”
Balyasny personnel changes
In the letter Balyasny Asset Management seems to indicate that it is in expansion mode. In recent months, SAC Capital has lost some employees, and it is likely that many are flocking to Balyasny. The hedge fund notes:
“The ability to hire top PMs is much better than it has been due to the industry, prop and startup dynamics, as well as the evolution of talent that survived the last five years in the region. Although still a challenge, we are finding more PMs in Europe who have strong risk management skills and who run low net exposure strategies.”
The fund recently added five new European PMs, three in macro strategies and two in equities. “Over time, we would like to see our aggregate portfolio European risk increasing to a level similar to our Asian exposure (10-20 percent),” the letter said.
Furthermore, the letter notes how it is investing heavily in its core business structure “unlike many hedge funds we are not a firm that treats the management fees as a profit center.” The fund is looking to make additions in risk management, compliance, technology, and recruiting development and has “seen a 75% increase in the staffing across our Risk PM Development, Analytics and Quant group. This is particularly important for us because our risk team is not your traditional monitors. They conduct a variety of statistical work to assist the Investment Committee in our PM development work. We use this quantitative work to help PM’s scale, improve performance, and to progress along the path from senior analysts to PMs and from junior PMs to senior PMs.”
Balyasny increasing depth and capacity of management team
“Over the last year we have focused on increasing the depth and capacity of the management team.” In New York, the fund’s largest office, they promoted several of our long-term equity PMs to co-heads of the office on the investment side. The co-heads are Paul Brinberg (Partner, PM Media, 10 years at the firm), his partner Anil Gondi (Co-PM Media, 9 years at the firm)