Taconic Capital Advisors, with near $9 billion in assets under management, had a steady second half, returning approximately 3.24 percent in the Taconic Opportunity Fund and 2.83 percent in the Taconic Event Driven Fund, while the fund thinks most asset classes are fairly or fully valued, according to an investor letter reviewed by ValueWalk. The $9.1 billion fund was co-founded by Kenneth Brody, who retired in January of this year.
Taconic Opportunity Fund gains attributed to credit and equity portfolios
Gains in the Opportunity Fund were mostly attributed to credit and equity portfolios and, to a lesser extent, capital structure arbitrage/hedged credit, while losses were generated in portfolio hedges and macro. The credit portfolio in particular benefited from its positions in distressed and liquidation situations which are typically opportunity driven.
Contributions from equity positions were widespread as the market moved higher in general, while losses came from portfolio hedges in short positions in emerging market sovereign debt, as well as derivative positions in futures and options on equity market indices, pointing to the fact that hedging market risk has a cost.
The company’s bank lien in TXU, Texas Competitive Electric Holdings (later renamed Energy Future Holdings) benefited from a chapter 11 filing, the firm’s Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ), J C Penney Company Inc (NYSE:JCP) debt Gulf Investment House bank liquidation, American Airlines Group Inc (NASDAQ:AAL) claims on Icelandic bank debt (Kaupthing and Glitnir), Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY) and LBIE boosted the performance.
Taconic Capital Advisors’ equity portfolio gains
In the equity portfolio gains included TIM Participacoes SA (ADR) (NYSE:TSU), DIRECTV (NASDAQ:DTV) and Forest Laboratories, Inc. (NYSE:FRX), while losers included Ally Financial Inc (NYSE:ALLY), which traded poorly following an IPO and AstraZeneca plc (ADR) (NYSE:AZN) (LON:AZN), which fell out of favor with investors after a deal with Pfizer Inc. (NYSE:PFE) didn’t come to fruition.
Other equity contributors to performance included WPX Energy Inc (NYSE:WPX), which, for the first time since its spin-off from Williams in early 2012, posted positive earnings and beat estimates – erasing losses from the first quarter as new management went on a road show to tell their story to institutional investors and the media.
Taconic Capital Advisors’ top gainer Micron
Micron Technology, Inc. (NASDAQ:MU) was a winner for the fund, even though the stock didn’t immediately react to a strong earnings report. Fundamental factors, such as stabilizing industry product pricing amid industry consolidation have boosted results. The investment community, the report notes, is just beginning to understand the fundamental shift that consolidation has meant to increased corporate pricing power, the report said. David Einhorn and Seth Klarman are large investors in the stock.
General Motors Company (NYSE:GM) was a positive, as the blood on the street from the first quarter cleared in the wake of its ignition switch recall. However, Taconic reduced its exposure in the stock due to what the fund termed a “wider range of possible outcomes,” which might indicate all the blood might in fact not be spilled in this value play yet. The company is among the most popular hedge fund stocks.
While the Taconic Capital Advisors’s overall outlook is that most asset classes are valued at appropriate or high premiums, they are finding idiosyncratic opportunity through deep research among situations that are not properly recognized by the wider investment community, the letter said. In particular, they are looking at beaten down European credit for opportunity where this is still minimal competition for deals.
In equities they are finding opportunities in part due to cheap financing, high quality cash flows and mergers and acquisition, the letter said. In particular, the hedge fund is finding value in Asia. The letter notes Korean preferred equity shares in Samsung Electronics Co. Ltd. (LON:BC94) (KRX:0059935) and Hyundai Motor Co (KRX:005380) (OTCMKTS:HYMLF), Sino-Forest Corporation (TSE:TRE) (OTCMKTS:SNOFF) credit, and iMedia International, Inc. (OTCMKTS:IMED) and PetroChina Company Limited (ADR) (NYSE:PTR) (HKG:0857) equities all ‘performed well.’
The hedge fund added to its HR, compliance and IR team, and hired Brian Shearer and Jordan Hughes as analysts. Michael Schwartz, a Principal of the fund, is leaving after ten years according to the letter.