Waterstone Market Neutral Fund scored some profits in its longtime bearish bet on Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) in last month. The fund rose 2.6% in March, after it had flattened its gains of January with colossal losses in February . Waterstone managed to end the first quarter with a positive return of 2.46%, according to a March investor letter reviewed by ValueWalk.

Fannie Mae

Waterstone’s assets plunge

Waterstone had a particularly rough time over the last twelve months, the fund lost nearly 20% in 2013. Assets of the fund have stripped down to $478 million from $1.5 billion in May 2013, due to losses and redemptions. The fund started this year with $700 million, it seems assets at the fund are in a free fall mode.

The fund had reduced its short exposure to the GSEs in March, according to the February letter. As it turned out the introduction of Johnson-Crapo legislation in Senate led to sell-off in Fannie’s stock, thus contributing a profit to Waterstone’s return in March. As its position in Fannie and Freddie has continued to wobble both ways, the fund managed another month of profits from long position in Talmer Bancorp Inc (NASDAQ:TLMR and NMI Holdings Inc (NASDAQ:NMIH).

Long hedge in Herbalife

SUPERVALU INC. (NYSE:SVU), another one of the fund’s volatile short positions, once again ended the month with a loss for Waterstone. Seeking to profit from the volatility in Herbalife Ltd. (NYSE:HLF), Waterstone took up a long in HLF convertibles which did not return well in March, the letter noted.

“The converts lost some value with the announcement of an investigation by the Federal Trade Commission. This is a very cheap convertible bond and we are hedging it market neutrally with the stock, expecting to profit over time from the volatility of the stock.”

Waterstone on Cerberus Group’s plans for Albertsons

Waterstone had some luck in another consumer discretionary, the fund was up in its short credit position in New Albertsons. The value of New Albertson’s credit dwindled as it was announced that the company will continue to run as a separate entity even after its’ merger with Safeway Inc. (NYSE:SWY), both companies are owned by Cerberus. Furthermore it was announced in April that New Albertsons would be absorbing the worst assets of Safeway at a steep price, indicating that its demise is near, the letter said. This short would benefit Waterstone in April as well, and likely push the company to bankruptcy sooner, something that the hedge fund has rooted for a long time.

 Waterstone calls New Albertsons “best investment opportunity in its history“, in the letter. Cerberus Group has previously sailed Mervyn to bankruptcy in 2004. The group sold Mervyn’s valuable assets and took cash out of the operating company and then let it go bankrupt. The letter sheds some light on Cerberus Group’s ‘evil’ plans for New Albertsons,

“It [Cerberus Group] is using New Albertson’s to overpay for bad assets Cerberus does not want while it buys New Albertson’s better assets at below market prices into separate entities owned by the Cerberus Group. It is clearly a “good bank / bad bank” situation where ignorant creditors to New Albertson’s (the bad bank) do not understand what is being done to them, as the Cerberus Group is not filing financial statements and not disclosing needed financial information or details on what assets are being sold out of New Albertson’s and what assets are being bought by New Albertson’s”