ADW Capital Partners 2016 letter to investors
2016 Hedge Fund Letters
It is our pleasure to report results for the 4th quarter of 2016 and our 24th quarter since inception.
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
At the risk of sounding like a broken record, we want to reiterate a critical point discussed in all quarterly letters. ADW Capital Partners, L.P. (the “Fund”) operates a concentrated, tax-sensitive and long-term strategy designed to minimize correlation to the broader indices with a focus on avoiding permanent capital loss. Inevitably, this approach will result in periods of underperformance. By the same token, our efforts to maintain a lower correlation strategy driven by company-specific outcomes may produce significant outperformance in periods of market weakness, as we saw in 2011. We are not traders, return chasers or month-to-month stock jockeys. We are investors who look for opportunities to return multiples on the Fund’s capital in a tax-efficient manner over an extended period of time. While this strategy may yield lumpy results, we believe it limits idea dilution and protects the Fund’s returns from Uncle Sam and Wall Street.
ADW Capital Partners – “Stick to the Script to Stay in the Movie”:
WOW. +25.2 percent for 2016 and returns of ~27 percent for six years. It could intoxicate even the best of us. Better yet, the fund is already off to a roaring start in January…It is so easy to get caught up in the noise, hysteria, and cacophony that is the “institutional hedge fund business”. Let’s be clear here. We don’t believe we run a prototypical “hedge fund”. For those of you familiar with my background, ADW Capital was birthed out of a personal lifetime passion for investing and need to “get leverage on my own best ideas”. There were no Monte Carlo simulations run to target Sortino or Sharpe Ratios or differential equations to target ideal leverage and position sizes. In the olden days, “hedge fund” really meant a fund that does not have a single mandate to make money – as long as they made money. Long, short, sideways, it didn’t matter if you were creating value for your customers. It also meant that you were allowed to charge modest fees to your investors because you earned them by consistently outperforming your benchmarks net of fees.
Today the industry is plagued with too many players and investors with unrealistic expectations about volatility, liquidity, concentration, and targeted exposures.
Why have we been successful while others have struggled? The answer is quite simple: YOU. Because I love what I do so much, I have been able to build a business that has allowed me to invest the way I would invest personally – chunky positions, long hold times / low turnover, and use volatility as a tool as opposed to letting it cripple me. I was very fortunate to not get a single call from an unhappy investor while the fund was going through a greater than 20 percent drawdown through the end of 2015 and into 2016. In fact, I got many words of encouragement and a few checks too, to add to our names we had increasing conviction in. As you might recall from this year’s earlier letters, all of our companies reported tremendous 4th quarter results and were tirelessly creating value that the market for one reason or another didn’t care about at that fine moment. But it was because of you – our army of almost seventy likeminded limited partners that we did not retreat but we in fact “doubled down”. While there are always “shortcuts” available to those anxious to get somewhere in a hurry, we are proud of the business we have built and the loyal partners that have built it. We believe it presents an excellent foundation for the future. Furthermore, we believe this excellent foundation “allowed us to stick to script, so we could stay in the movie”. Had we accepted limited partners who had short term goals different than our own, could it have affected what we would have done in those more difficult moments earlier in the year? Certainly. In fact, I would go as far as to say that that is perhaps the single biggest problem in the fund business today. Managers are running their portfolios to meet unrealistic investor expectations as opposed to managing them for long term results. Fortunately, we have self-selected away from that investor cohort and have built a business I can run for the rest of my life and at some point even my progeny.
So, this is a long winded way of saying that after six years, I am very thankful for the kind words, support, and loyalty of our partners. While I cannot promise things will always go up and to the right, I can promise you that our resolve has never been stronger. So thank you for creating an environment to let me go to war for you every-day.
To that end, we will not be talking about current or prospective investments in this letter. It has become quite evident that there are a number of “home gamers” who get their hands on our letters and are trying to replicate our positions/portfolio. As many of you are aware, we are actively raising funds to increase our pro-rata stakes in many of our positions and by no means want to “front-run” ourselves or you. My allegiances are firmly to the current partners of ADW Capital Partners, L.P. – myself being the largest.
If current partners are interested in giving me, my mom, and the rest of the ADW family a hug or learning more about what we are up to in a controlled environment, I encourage you to come to our meeting next month.
This will be a little repetitive… In connection with the growth of the firm and based on reverse inquiry, we have decided to host our first annual meeting / breakfast the morning of February 16th at Jefferies in NYC. While the meeting is reserved for existing limited partners, we may have select availability for a few “serious fans”. Please let us know if you would be interested in attending as we need contact info for security.
We want to thank all of you again for the opportunity to steward your capital and look forward to many more years with you as partners.
As always, we are available to answer any and all of your questions regarding the operations of the Fund or about the exciting opportunity set we are currently deploying capital into.
Adam D. Wyden