Like many hedge funds, Aristides Capital has a primary objective to “seek capital appreciation.” What makes the primary long / short equity fund perhaps most interesting is they prefer to do so “while attempting to maintain a low correlation to the U.S. stock market, and to limit downside volatility to less than historical norms for the S&P 500 index,” according to a review of fund documents by ValueWalk.
Generally low volatility, a 76% monthly win percentage and a 17.03% annualized return
How is the hedge fund with just $62.3 million under management run by the humorous Christopher Brown doing? With a 17.03% annualized return reported since its August 2008 founding and a historical beta to the S&P 500 of 0.23, the fund has a monthly win percentage of 76%. Often with a win percentage that high the fund’s loss size is the next component to consider, but that appears not to be an issue in the past. Those reported numbers come with generally subdued volatility from 2010 forward. From a noncorrelated standpoint that is noteworthy. This is particularly true given the primary volatility the firm experienced in late 2008 and until July 2009 was mostly upside deviation, a different risk factor than downside deviation, some quantitative analysts have asserted.
“It’s been an interesting year so far,” fund manager Christopher Brown wrote of the firm that was registered with the SEC from July 7, 2008 to August 2, 2010. “I don’t know what the next five months will bring, nor am I trying any harder than usual to make money.”
That “trying hard to make money” comment might be put in the context of what appears to be one of the fund’s performance driver strategy points: Long / short ratio management.
While numerous long short programs will generally remain largely long – it is not uncommon to see a consistent net 25% to 50% long exposure in long / short portfolios – Aristides Fund has a reasonably dramatic swing in their ratio management. As the fund’s August performance overview states, the long exposure can range from “negative 20%,” otherwise known as short, “and positive 60%.” Most often, however, the fund is generally long 20% to 40%, a source familiar with the fund strategy said.
To balance its long / short ratio exposure the fund frequently utilizes derivatives and apparently determines long / short ratio based on stock valuation and macro sentiment factors:
In order to offset some of its market risk, the fund takes short positions in broad market indices, such as Russell 2000 futures. The fund may also short securities representing a specific sector in order to hedge a portion of its sector risk. To a lesser extent, the fund also shorts individual equities. In determining the overall net portfolio exposure, the General Partner considers various factors including valuation and variables which reflect the sentiment and asset allocations of other market participants.
On the stock side the fund, trading primarily in small- and micro-capitalization stocks, employs a fundamentally-driven valuation method to determine long-term value plays. There is another strategy component dedicated to “short-term behavior of single equity prices,” otherwise known as trading. The strategy details on this component were not clear and the fund did not respond to a request to comment.
“We weren’t perfect in July but our losses were small and few, whereas inordinately many positions contributed significant profit,” Brown wrote to investors. “Sometimes it seems that our stocks don’t care what the small-cap or microcap indices are doing, but July was definitely not one of those times. The markets were rallying hard and our long positions rallied hard as well.”
One such example could be the niche stock of Independence bank of Georgia. Using a proprietary valuation model, they determined fair value for the stock at $8.77, and purchased 50,000 shares from the FDIC on November 2013 for $5.50 per share. Today those shares are worth $16.03 after a takeover from Pinnacle Financial drove the stock higher, making this the largest winner in July for the fund.
The biggest winner in the short book was Anavex Life Sciences, which Browns says is “a highly-promoted reverse-merger scam run by German investment banker Christopher Missling, who strikingly resembles Wormtail from the Harry Potter series, both inside and out.”
Chris opines in a clever manner:
With the help of internationally known fashion model Nell Rebowe, whom he hired as Director of Business Development, the two were able to “stupefy” retail investors for the past year. (Incidentally, we’ve reached the point in the bull market where obstetricians from New Jersey, in between delivering babies, find time to tweet about how Anavex will cure Alzheimer’s Disease and stockholders will party.)
The company released shockingly poor clinical trial data last week, and the stock dropped like a stone. I say “shockingly” because even though I am 100% convinced that their drug is worthless and not effective, the trial was an open label phase 2a, with no comparator, being run by a doc with ties to previous questionable clinical trials, and was merely a 31-week look at data that had earlier appeared deceivingly decent. If you can’t make that data look good, it’s not ever going to look good. Not even if Nell Rebowe is presenting the data. Which, incidentally, she was. We used the weakness in the stock to cover a part of our short position, but expect the shares to continue to drift towards zero over time, punctuated by occasional “dead cat” bounces inspired by misleading press releases and eager day traders.
Short Harry Potter / Long Southern bankers got it.