Lakewood Capital Management must feel like Chicago Cubs designated hitter Kyle Schwarber, who is firing on all cylinders in the World Series after a year of rehab. Likewise, Lakewood Capital generated strong 4.3% returns in the third quarter. But the win size could have been much more significant had it not been for the short exposure, according to the hedge fund’s Q3 letter, a copy of which was reviewed by Walk.

Lakewood win size higher than loss size as benchmark performance exceeded on both sides of exposure ledger

Much like pitching a no-hitter in the World Series, there are some needles that are just difficult the thread. In a long / short hedge fund strategy, getting both sides of the exposure to generate positive returns is unusual, particularly in a quantitative easing environment. That said, Lakewood Capital’s Anthony Bozza found fat tail returns on the quarter.

During a quarter when the general benchmark S&P 500 was up 3.31%, Bozza’s Lakewood Capital outperformed by a factor of three on his unhedged long exposure. Naked longs on the quarter were up 10% while the hedged equity ownership was up only 3% positive returns.

It was the short exposure that trimmed performance, subtracting -7%. On the quarter win size was near 1/3 higher than loss size, a factor considered in certain algorithmic hedge fund allocation models.

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Lakewood Capital – big winner on banks as interest rate rise anticipated

Big winners in the portfolio were mostly big names: MasterCard and Citigroup in the financials recovering from Brexit woes alongside Deutsche Bank woes and a transaction-dependent FedEx in transports showing economic signs of life helped the portfolio.

Looking at the market environment from a fundamental point of view, Bozzo paints a limp but steady picture, one where certain rate-sensitive stocks, such as utilities, real estate investment trusts and consumer staples, have pushed to near record valuation levels. This leaves the fund in “a complex stock-picking environment.” Calling low interest rates a “well-publicized challenge to the financial sector,” he likes the banking sector at this point, looking for and receiving a mean reversion in the sector.


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