Odey Management meet Regal Fund Management
Crispin Odey has attracted plenty of negative media attention over the past few weeks after it emerged that his main hedge fund suffered a 49.5% loss during 2016, following a decline of 13% during 2015. Client assets fell by 60%.
These almost irrecoverable losses put Odey’s flagship fund at the top of large hedge fund loser board for 2016 and, an enviable position no manager wants to find themselves in. But as it turns out, Odey is not alone in the 40%+ losses category.
One of the few well-known hedge funds trading out of Australia also racked up losses of 40% or more last year. The A$193 million Atlantic Absolute Return Fund, which is managed by Regal Funds Management, lost 44.5% last year as a number of bullish bets backfired against the company according to the fund’s letter to investors, a copy of which has been reviewed by ValueWalk.
Regal Fund Management more volatile than Odey
A loss of 44.5% for the Regal Fund Management Atlantic fund is disappointing but it is in fact only the second largest loss in the fund’s history. In 2008 the fund lost 68.2% and a few years later in 2011 the fund reported a loss of 15.2%. However, returns of 100% per annum or more are not uncommon for the Atlantic fund so a loss of 44.5% is not the end of the world. Indeed, despite the losses of 2008 and last year since inception (February 2004) the fund has generated an average annual return of 35.99%, with an annualized standard deviation of 37%, maximum drawdown of 68.69% and Sortino Ratio of 1.39. Since inception, the fund’s net asset value has grown a staggering 5,068%.
Such impressive, yet volatile returns can be traced to the fund’s high level of leverage. At the end of 2016, the fund had a gross exposure of 355% and a net exposure of 208%. Total long exposure was 281% of NAV and short exposure was -71%.
Commenting on the year’s performance the fund managers write in the year-end letter:
“While global stock market indexes made good gains to close out the year, these returns masked what continued to be a difficult stock picking environment, with the broad theme of rotation into larger capitalization companies continuing to challenge returns for active stock picking strategies that focus on smaller or mid-sized companies. This is clearly demonstrated by comparing the Fund’s performance to the ASX300 Accumulation Index where the Fund’s long book generated all the negative alpha in December, while positive alpha was made on the Fund’s short positions.
Specific challenges for the Fund in December were centered on stocks within the Consumer Staples, Energy and Information Technology sectors. Highlights came from the Materials sector, which was pleasing given the difficult run the Fund has had in that sector in prior months.
Despite the current challenging investment backdrop for bottom-up stock picking, we remain favourably disposed to companies that can display above average levels of earnings growth, which are generally smaller to mid-cap companies. The Fund continues to run an overweight bias towards these stocks, expressed through Regal’s rigorous bottom up stock selection process. We believe the recent sell-off in the small to mid-cap space has created numerous compelling investment opportunities and it is our expectation that solid alpha generation will be achieved over the medium to longer term.”
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