Greenlight Masters annual letter for the year ended December 31, 2016. This is David Einhorn’s fund of funds – see his hedge fund letter here

We noted earlier that Mangrove was a big winner in 2016, and happened to be one of best performing fund held by Greenlight Masters.

 

Also see

2016 Hedge Fund Letters

Greenlight Masters 2016 Letter: Long Mangrove

Full letter below

Dear Partner:

Greenlight Masters Qualified, L.P., Greenlight Masters, L.P. and Greenlight Masters Offshore returned 13.4%, 13.2% and 12.8% respectively for 2016, net of fees and expenses,1 while the S&P 500 index returned 12.0%. On a look-through basis, the funds had an average net long exposure of 43% for the year.

Greenlight Masters

In 2016, many surprising macro and political headlines left investors scratching their heads – if not over the events themselves, then by the market’s reaction to them. Throughout the year, hedge fund managers reported challenges navigating slowing (and then accelerating) growth in China, the oil price crash (and then boom), a credit dislocation (and then rally), negative sovereign interest rates, Brexit, the U.S. presidential election and the President-elect’s tweets. Few investors predicted Donald Trump’s victory in November, and even fewer anticipated the subsequent market rally into year-end. While many had difficulty navigating the turbulence, collectively Masters’ managers profited from it.

Greenlight Masters

Greenlight Masters’ underlying funds capitalized on distress that had begun to surface in mid-2015. Our managers made successful investments in industrial and commodity companies after oil prices collapsed. Similarly, around half of our funds bought bonds and bank debt of stressed and distressed issuers during the sell-off in the credit markets early in the year. More recently, several Masters managers have acquired debt and equity securities of companies that are currently in bankruptcy or have recently emerged from bankruptcy.

Although several funds generated exceptional returns in 2016, Masters’ outperformance was broadbased. Nearly two-thirds of our funds beat the S&P 500. According to Morgan Stanley Prime Brokerage, the median return for global long/short funds in 2016 was 1%, and the top-quartile return was 7.2% or better. Of the 18 funds Masters was invested with for the entire year, 14 were in the top quartile and none were in the bottom quartile.

Masters’ best performing fund in 2016, PlusTick Partners, returned 56.2%. It entered the year net short energy companies, but pivoted during the sell-off, went long and profited handsomely. PlusTick’s purchase of distressed bonds at 40 to 50 cents on the dollar that rebounded to par by year-end, and its investments in equity and credit securities of bankrupt coal companies were positive contributors.

When PlusTick struggled in 2015, we considered the result to be consistent with the potential volatility of its investment program. Rather than mechanically redeem after the drawdown, we made a favorable forward-looking assessment, and our decision was rewarded this year.

Greenlight Masters

Mangrove Partners returned 50.9% for the year. The long portfolio and strong contribution from event-driven investments drove most of the performance. Early in the year, Mangrove bought distressed debt and equity of energy and materials companies during the sell-off in commodities. In certain instances the fund was actively involved in the restructuring of these companies. Positions including SunCoke Energy, Career Education and Cliffs Natural Resources that detracted from performance in 2015 were among the largest winners in 2016. Portfolio Manager Nathaniel August discussed Cliffs in Mangrove’s September letter:

It was incredibly gratifying to see one of our largest losers turn into a significant winner for the Funds due largely to our thesis being borne out. While we are certainly not always correct about the prospects for inexpensive and out-of-favor investments, when they do go right, the resulting profits are frequently substantial due to both higher earnings and a higher multiple.

Sessa Capital returned 34.1% to rank as our third best performer. The fund’s largest position, Chemours (CC), returned 317% in 2016 and was a key driver of results for the year. Sessa wasn’t the only Masters manager to find CC (spun off from DuPont in June 2015), as Greenlight Capital and 683 Capital also owned CC this year. We believe CC was the largest individual security contributor to Masters’ return in 2016.

Our seed investments in Firefly Value Partners and SQN Investors continued to sprout. Each manager performed well, and as a result of our shared economics generated additional return to Masters. Firefly returned 23.1% to Masters in 2016 led by long investments in natural gas companies, banks and industrial companies. Firefly’s largest position in 2016, an Appalachian natural gas and E&P company, Rice Energy, was its biggest winner.

In 2016, Firefly’s short portfolio saw 20 of its positions become “zeroes” through bankruptcy or massive dilution. Shorting potential zeroes is particularly challenging as these stocks often stage strong rallies (“draw-ups”) along the way. When Firefly examined all of its shorts that ended as zeroes, here’s what it found:

More than 70% of our shorts that have eventually hit zero saw their prices rise by at least 50% while we were short. Just under half of our zeroes have doubled at some point. A full 25% have tripled — or worse. Among all of our zeroes, the median draw-up is 96%, and the average is 143%.

Over its history, Firefly has had 124 shorts ultimately go to zero.

SQN returned 21.8% to Masters. Its concentrated long portfolio performed well with special help from the buyouts of inContact and Infoblox. Portfolio Manager Amish Mehta also added to core positions and selectively initiated new positions during the episodic sell-offs in tech. SQN launched in September of 2014 and began 2017 with about $250 million of assets under management.

In addition to fundamental investments, EcoR1 Capital also capitalized on tactical value-oriented opportunities (and generated good karma from fighting hazardous diseases). The biotech-focused fund made 13.1%, which stands out in light of the 21% decline in the NASDAQ Biotechnology Index (NBI). EcoR1’s success came from its short book, the IPOs of two gene editing companies, a private investment in a company with a multi-drug resistant anti-bacterial medication, and the opportunistic purchase of a block of stock in a small biotech company from a liquidating hedge fund.

North Tide Capital was down 3.2% in 2016 as good performance from its short book did not compensate for losses in long positions in a hospital company and a supermarket. Portfolio Manager Conan Laughlin is sticking to his fundamental value knitting:

We have closed out of all but two of our top 10 winners and at the same time we remain invested in every one of our top 10 losers… I think about it more that when the risk/reward computes, we play, and when it doesn’t we move on. Everything for us is based on risk and reward at the current price.

JMB Capital was down 3.4% last year as the portfolio’s generally bearish posture proved incorrect. Toward the end of the year, JMB announced it was returning outside capital to investors, which we received on December 31. We

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