Engaging in a short strategy inside a Long / Short portfolio is not all negative. Raging Capital Management, heading into the close of the year with 27.5% year to date performance in the Offshore Fund Series B, could be exhibit A of hedge funds whose short exposure didn’t drag down the fund during a gory bull market run. With a 27.5% return in 2016 – up 9.3% alone in the fourth quarter – William C. Martin, the fund’s chairman and chief investment officer, is bullish on being bearish. But unlike macro approaches that determine a negative overall outlook and wait for a major negative catalyst, Martin is selective in his company-centric short thesis, a January 10th 2017 fourth quarter letter to investors, a copy of which was reviewed by ValueWalk. While beta market performance drivers turning lower would help many of his positions, Beta assistance is not entirely required for the fund to achieve success.
Raging Capital buys on dips
The majority of the fund’s 2016 performance resulted from long exposure. Nearly 20% of the portfolio was concentrated in 17 long positions coming into the close, with a relatively even returns distribution profile where 17 positions each contributed 75 basis points or more.
Even in his long book, Martin can’t help but be a contrarian to a degree. The fund’s best long exposure – Crestwood Equity Partners (CEQP) and Range Resources (RRC), both traded on the New York Stock Exchange, were relatively little loved shares previously. Martin caught the mean reversion, buying on the price dip, and it paid dividends in 2016. In fact, when CEQP had a drawdown in 2016 – delivering meaningful losses to the portfolio at the time – Martin “doubled-down” and purchased more stock.
RRC is a slightly different story. Martin and his team were “trading around the position” during the spring, watching the stock rally from $25 to $45. With the price spike, Raging Capital exited the position to “wipe clean some heavy baggage.” Exiting an emotional roller coaster allowed the investment team to “catch our breath” so that the situation could be examined with a “clear head.” Given this, Raging Capital is a raging bull on the stock, thinking the market is undervaluing continued advancements in fracking technology. In the sector, the fund also likes Antero Resources and the restructured Magnum Hunter Resources, a firm that owns a substantial stake in the “strategically valuable Utica pipeline system.”
In regards to Trump rally stocks, Fiat Chrysler, a firm investor’s recently learned was under a US Department of Justice fraud investigation, was the fund’s biggest winner until January 10 newsletter publishing date. The stock price, after having a strong rise from just above $7 to over $11 in early January, fell back to $9.70 on the investigation news.
Raging Capital Management shorts villains of 2016
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