As the stock market has been rising, the Waterstone Market Neutral Fund had a challenging May, down 3.76 percent according to an investor letter reviewed by ValueWalk. Over the last three months the S&P 500 (INDEXSP:.INX) index moved higher from 1872 to 1962.

Waterstone Market Neutral Fund

Waterstone Market Neutral Fund short position in SuperValu

Briefly mentioned in the investor letter is its short in SuperValu INC. (NYSE:SVU), which is up over ten percent in the last three months. Not mentioned in the report was Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA). As previously reported in ValueWalk, Waterstone reduced their Fannie Mae short exposure previous to the precipitous drop in the stock price.

As previously reported in ValueWalk, Waterstone had a particularly rough time over the last twelve months, the fund lost nearly 20% in 2013. Assets of the fund continue to slide, down to $437 million from $478 million we reported in April and from $1.5 billion in May 2013. The fund started this year with $700 million, and at the time we noted fund assets under management appeared in a free fall mode. Waterstone’s May drop is the second worst of the year, following an -8.03 percent decline in February. The fund is down -1.65 percent year to date.

On the positive side, the fund noted its top single name contributors for the month. This included PAR PETE CORP (OTCBB:PARR), which was up 0.47 percent after the energy company restated earnings, announced of a new drilling program and the acquisition of Mid-Pac Petroleum.

Waterstone Market Neutral Fund likes RBS

In the banking sector the fund likes Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS).  Waterstone has been long RBS long preferred for three years and they were up yet again in May, this time contributing +0.27 percent to the bottom line.  The firm also likes the long convertible bonds of Somerset Cayuga (SOMCAY), which added +0.20 on the month.

Intel Corporation (NASDAQ:INTC) short convertible bond on a market neutral hedge contributed +0.15%, the report noted. “Our position in INTC 2.95 benefitted as primarily long-only outright investors sold positions to make room to buy new issues,” the report said. “New issuance has picked up considerably in May and June. If this continues, many of the convertible bonds we are short could see their overvaluations correct sharply.”

Waterstone Market Neutral Fund bets that didn’t workout

Bets that didn’t work out for the fund included Doral Financial Corp. (NYSE:DRL), which detracted -1.62%.  The fund had been long Doral’s convertible preferred and experienced “several ups and downs.” Doral, which has operations in the U.S., is regulated by the U.S. and issues its securities in the U.S., is significantly exposed to the Puerto Rican economy and recently suffered from a negative tax ruling.

In addition to its mention of SuperValu INC. (NYSE:SVU) short losing on acquisition talks, another detractor was Hologic, Inc. (NASDAQ:HOLX) short convertible bonds, which “detracted -0.30% as outright buyers continued to buy this bond despite its gross overvaluation.”