When looking at Lakewood Capital Management’s muted 1.5% quarterly performance, investors might yawn at the hedge fund’s performance. But that belies important differences in the Long / Short strategy, with a particular emphasis on what happened on the short side of the portfolio during the quarter. In the fund’s second quarter letter to investors reviewed by ValueWalk, fund manager Anthony Bozza discusses capital preservation at the “latter stages” of a bull market as he mentions new short opportunities.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Antony Bozza LAkewood Capital Lakewood Capital Management

Lakewood Capital Management recognizes value of capital preservation with market near highs

With the stock market up near 1% from March 1 to June 30, Lakewood technically trounced the index over that period of time by 50%. In absolute terms, however, a 0.5% differential, while noteworthy, might go down like decaf coffee in the morning.

But taking a deeper look, long equity positions significantly beat the S&P 500 beta by generating a +4% return on capital over the period, bolstered by long exposure to financials such as CIT Group and Citigroup, its largest winners on the month. Further, hedged long equity positions generated a +6% return, significantly higher than the fund’s self-identified S&P 500 benchmark.

With such strong gains on longs, why the muted 1.5% performance” It was the short exposure that generated a -4% return on capital that in large part was causation.

But Bozza isn’t going to diminish the need for short exposure, despite the risk mitigation method subtracting from absolute returns.

“As we push into the latter stages of a bull market, it can be easy to overlook our fund’s relentless focus on capital preservation,” he wrote. “Importantly, we achieved our results with a consistent, careful approach to risk management, underscored by the fund’s relatively low average gross equity exposure of just 116%.”

That average equity exposure is currently lower than the historical standard at 70.9% long and 31.8% short with a net exposure of 39.1%.

The hedge fund notes with pride that on its 10 year anniversary:

In what has often been characterized as the era when the art of fundamental stock picking met its demise, the fund generated an +18% annualized gross return on its long positions and a +4% annualized gross return on its short positions, representing a spread of +22% annually (in fact, this spread has been at least +5% in every year since our inception).

The hedge fund is long Ally Financial and sees 60% upside from current levels.

Lakewood Capital Management shorts Coherent and China Evergrande


Please login to view the rest of this article - Not subscribed? Get our adfree exclusive content for only a few dollars a month.

It also helps us fund our operations so think of it as supporting quality journalism.