Greenlight’s fund of funds vehicle, Greenlight Masters, notes the weakness in biotechnology and internet companies that were clear over the first half of the year. In a quarterly letter reviewed by ValueWalk, the managers of Greenlight Masters said that funds that are heavily exposed to growth names was severely hit by this rotation in the markets.
However, it appears from the letter that the Masters fund has escaped the worst of these falls. The fund is up 5.8% YTD. Greenlight Masters welcomed Joe Euler as an analyst, who has previously worked at Novus Partners and Cambridge Associates.
A fund of funds uses its assets to invest in other hedge funds. Some of the hedge funds Masters is invested in are Dan Loeb’s Third Point and Anthony Bozza’s Lakewood Capital, David Einhorn’s Greenlight Capital and the top five largest funds account for 62% of Masters’ total capital. Masters currently have investments in 17 funds, of which its top performers in the first half were, East Bridge Capital, Mangrove Partners and EcoR1 Capital.
Greenlight Masters’ top performers
East Bridge Capital is an emerging markets focused fund, with heavy concentration in the Indian market. East Bridge was launched only a couple of years ago by former SAC Capital portfolio manager Shakeeb Alam. Greenlight said that they had been adding to their investment in East Bridge, which has been fruitful considering that the fund returned nearly 35% to Masters’ in the first half.
Greenlight Masters’ second best performer was Mangrove Partners, which is a long/short equity fund with exposure in Brazil, India, South Africa and United States. Masters have also invested in a biotechnology focused fund EcoR1 Capital, which was its third-best performer in the first half. The FoF initiated an investment in January this year and has so far reaped a 16% return from EcoR1.
Losing positions were in Sheffield Partners and Firefly Value Partners. However Firefly is recovering, the fund has several short positions which have generated alpha for the Masters’ fund. Greenlight has invested in Firefly’s special purpose vehicle (SPV) in July, which is meant to tap into shale rich regions. The SPV is going to acquire mineral rights that Greenlight also thinks is a limited time lucrative opportunity after doing due diligence.
Greenlight’s new investments: Darsana and SQN
A new fund that Greenlight Masters have invested in is Darsana Capital founded by Anand Desai. Desai is an Eton Park alum. The FoF also invested in SQN Investors, a technology focused hedge fund launching in September this year. Greenlight Masters was all praise for SQN’s founder, Amish Mehta and his expertise in the tech sector. The letter said that Mehta has served as CEO of two tech companies and were a board member of several others and therefore has vast experience. Mehta has a mind of a value investor who focuses on free cash flow, margin of safety and competitive valuation, said Greenlight. The FoF will also receive part of the revenue earned by SQN, in addition to the return on capital.
The full letter can be found below
Greenlight Masters H1 Report
August 4, 2014
Greenlight Masters Qualified, L.P., Greenlight Masters, L.P. and Greenlight Masters Offshore returned 5.8%, 5.8% and 5.5% respectively for the first half of 2014, net of fees and expenses.1 The S&P 500 index returned 7.1% for the same period.
Although the S&P 500 was up in the first half of the year and market commentators repeatedly noted that volatility is at multi-year lows, the currents within the market were anything but calm. The Russell 2000 index experienced three moves of more than 10% in the first half of the year, and some pockets of the market suffered even greater volatility. For the six weeks starting March 1, the biotechnology sector represented by the iShares Nasdaq Biotechnology (IBB) was down 18.5% and the Nasdaq Internet Index (QNET) fell 15%. These sudden moves proved harmful to many funds that found themselves with too much long exposure in growth names. According to Goldman Sachs, late March was one of the worst periods of hedge fund performance relative to the S&P 500 since 2001.2
The momentum sell-off in March and April created a favorable environment for Masters. Our managers are generally long companies with strong balance sheets trading at cheap multiples and short richly valued cyclicals, and/or levered companies. Masters was up 3.3% in March and April, doubling the S&P 500 return. By comparison, the CSFB Long Short Hedge Fund Index was down 2.2% in March and April and finished the first half up 3.1%. Many funds posted double digit losses over those two months. We believe that this sorting out process may continue and our managers are well positioned to protect capital and generate alpha.
East Bridge Capital was our top performer in the first half with a 34.3% return to Masters. As we discussed in our last letter, East Bridge (along with the Indian stock market) had a turbulent 2013, including a large decline through August. Sometimes the best time to make or add to an investment is during periods of distress when investors are most fearful and heading for the exits. This is often when the risk- reward ratio is most attractive. We conducted a forward-looking assessment and decided to begin adding to our investment in East Bridge in monthly tranches over a five month period. Although we invested with a multi-year time horizon, less than a year later, our incremental investment in East Bridge is up roughly 50% in aggregate, with the first tranche up over 70%.
Mangrove Partners was our second best performer, generating a 16.1% return in the first half of 2014. While the bulk of Mangrove’s gains came from long investments, the fund also made money on the short side. Impressively, its long/short portfolio more than
1Source: Greenlight Masters. Please refer to information contained in the disclosures at the end of the letter.
2Source: Goldman Sachs, “U.S. Weekly Kickstart,” March 28, 2014.
doubled the return of the S&P 500 with very little net exposure. Mangrove has taken advantage of opportunities in different geographies. The domiciles of its top five winning investments in the first half of the year reads like a World Cup bracket, including Brazil, India, South Africa and the United States. Portfolio manager Nathaniel August discussed how his portfolio positioning reflects his skeptical market view in a recent investor letter:
[E]mbracing market risk in the face of bad economic data and high valuations strikes us as a difficult gamble. One must believe either that data will improve to justify current valuations or that a market exit can be achieved before the music stops. Making either of these bets is inconsistent with our investment discipline. Instead, we prefer to wait for better bargains before embracing market risk.
Our third best performer in the first half was EcoR1 Capital. When we invested in the long-biased biotechnology fund, we were aware that the biotech sector was trading at an all-time high. Despite a big sector correction in March and April, EcoR1 has performed well this year, returning 13.3% to Masters since our investment in January.
Oleg Nodelman, EcoR1’s portfolio manager, sees significant dispersion within the sector. He