Cooper Creek Partners looks, smells and feels like a noncorrelated value hedge fund, with the exception of one key component. The long / short equity strategy, up 5.6% in the second quarter invests in small-capitalization and mid-cap, under-the-radar and/or out-of-favor single names, their quarterly performance update reviewed by ValueWalk reveals. Perhaps most interesting is they don’t like to be sheep. They look for truly “contrarian positions” – a partial nod to mean reversion – but do so with an eye for “the potential for transformational change.” It is this term, pointing to companies that are “transformational,” that might lead one to thinking this could be a low win percentage endeavor – much like trying to find new bands before they become mainstream successes.

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The oddity of Cooper Creek, however, is that their yearly and monthly win percentage is anything but low. With a generally consistent average annual return of 9.2% — and only one losing year in 8 full years of operation – the fund has returns attribution worthy of a noncorrelated leader.

Copper Creek performance

A Wall Street fund delivering consistent noncorrelated performance without derivatives

There are several methods to evaluate a noncorrelated investment strategy. Depending on one’s inclination, variables can be considered: correlation to various benchmark betas, performance during crisis and – perhaps the most popular but also the most deceptive – allocators can consider general market correlation statistics. These might be among numerous headline factors that are considered.

Underneath the hood, however, some algorithmic investment analysts like to model how win percentage correlates to win size in various market environments. They might look at consistency of risk management in terms of worst drawdown versus average drawdown. And they might consider the core performance drivers of the strategy relative to cyclicality.

Looking at these and other factors on a past performance basis, Cooper Creek passes so many of the noncorrelated hurdles despite missing one key ingredient: they are not using derivatives, and are particularly not using large market index derivatives.

In part, clues to this can be seen by looking at the win / loss size analysis, how their strategy maps to various beta market environments and their strategy composition. While the report did not mention derivatives, a source close to the fund’s strategy told ValueWalk they in fact use derivatives only on very rare occasions and then only to purchase an occasional call option.

Copper Creek portfolio positioning

Cooper Creek generating profitability with relatively even long short ratio

What Cooper Creek appears to do is watch the beta of its portfolio, keeping its long / short ratio relatively even on a portfolio basis with a slight tip to the long-side when beta is considered.

For a stock picking strategy that works mostly in small caps and appears to look for significant win size – as evidenced by their approach to look for stocks that can achieve astounding “transformational change” – the hedge fund performance profile is rather subdued. The largest win size occurred in September 2009 – 7.2% — and the largest loss occurred in January of this year, down -6.4%.  Both those numbers significantly beat comparable industry benchmarks.

What is most interesting is that most of the monthly returns both positive and negative are near 3% or lower. This type of consistency is most often on display in short volatility programs, which can have very large if infrequent worst loss sizes.  For Cooper Creek, there have been no such surprises to date. The performance driver behind this might be found in long / short ratio management and portfolio sizing.

Cooper Creek explains:

Both sides of the portfolio contributed positively in May and June, the short side outperformed the long side in each of those months despite a positive overall market return. Returns were diverse across the portfolio. Our largest five winners in the long portfolio each contributed over 100 basis points to performance in Q2, and our short portfolio had three winners contribute over 60 basis points during the quarter. Additionally, the portfolio had nine longs return over 20% and ten shorts return over 10% for the quarter.

Even long short ratio has companies with “transformational change” potential on the long side and less desirables on the short side

At the end of June the portfolio was nearly even long and short – a difficult exposure ratio when the stock market is persistently moving higher. The fund currently likes the small cap arena to provide transformational returns leadership. Small cap exposure is net 21.9% long while short they are short mid cap stocks – net -16.2% short.

Managing volatility is an important consideration factor in a noncorrelated strategy. While stocks continue to climb higher leading up to a presidential election with populist overtones, risk is in the air and Cooper Creek appears to smell it:

Given the volatility of the current market, we have strategically sought to narrow the expected timeframe for a catalyst to occur, and continue to be more nimble trading around positions. The increased turnover is a trend that began in 2014 and continues today, as we are “playing scared.” We are ever cognizant of the market’s potential to repeat a 2008 or 2011-like scenario, intently focused on preserving capital should that scenario ensue. It is this mindset that has driven our returns year-to-date, and we believe this mindset will serve our investors well over the next several years, as we expect increased volatility to remain…

Finding a transformational turnaround might seem to some to be a task akin to finding Taylor Swift before she was popular playing at LA’s Silver Lake Lounge playing in front 70 people. That is difficult because it never happened.

Cooper Creek fund manager Robert Schwartz, however, doesn’t apparently think his task is as significant. He looks for “positive operating margin inflections,” debt refinancing and monetization by selling off unrecognized corporate assets as his guidelines for finding long value.

In this effort Schwartz, unlike Taylor Swift, has found his match. Tutor Perini (TPC), a major construction play, checks all the boxes on his list. The stock “represents a combination of all of (Cooper Creek’s transformational criteria and) is this quarter’s Illustrative Investment Idea,” the investment letter said. “However, this under-the-radar, out of favor, ‘ick’ operational turnaround is being led by a financially savvy CFO Gary Smalley , rather than our typical CEO-led turnarounds.”

The letter concludes with the TPC thesis:

We believe TPC is in the early stages of a transformation, in large part due to the arrival of Gary Smalley and his focus on financial discipline and cash conversion, with the collection of $450 million of claims and unapproved change orders already underway. With $450 million of cash collection equivalent to 37% of TPC’s market capitalization, we see strong downside support as several value-unlocking catalysts unfold throughout 2016 and 2017. Even excluding this one-time boost of “trapped” cash, TPC shares have a free cash flow yield of 11.3% compared to its peer group average of 5.7%.

We are encouraged by the operational improvements in Q1 2016 and believe the one-time issues that plagued 2015 earnings are behind the Company. The lack of these

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