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Greenlight Masters Returns 13 Percent In 2016 As Mangrove PlusTick Up Over 50 Percent

Greenlight Masters annual letter for the year ended December 31, 2016. This is David Einhorn’s fund of funds – see his hedge fund letter here

We noted earlier that Mangrove was a big winner in 2016, and happened to be one of best performing fund held by Greenlight Masters.

 

Also see

2016 Hedge Fund Letters

Greenlight Masters 2016 Letter: Long Mangrove

Full letter below

Dear Partner:

Greenlight Masters Qualified, L.P., Greenlight Masters, L.P. and Greenlight Masters Offshore returned 13.4%, 13.2% and 12.8% respectively for 2016, net of fees and expenses,1 while the S&P 500 index returned 12.0%. On a look-through basis, the funds had an average net long exposure of 43% for the year.

Greenlight Masters

In 2016, many surprising macro and political headlines left investors scratching their heads – if not over the events themselves, then by the market’s reaction to them. Throughout the year, hedge fund managers reported challenges navigating slowing (and then accelerating) growth in China, the oil price crash (and then boom), a credit dislocation (and then rally), negative sovereign interest rates, Brexit, the U.S. presidential election and the President-elect’s tweets. Few investors predicted Donald Trump’s victory in November, and even fewer anticipated the subsequent market rally into year-end. While many had difficulty navigating the turbulence, collectively Masters’ managers profited from it.

Greenlight Masters

Greenlight Masters’ underlying funds capitalized on distress that had begun to surface in mid-2015. Our managers made successful investments in industrial and commodity companies after oil prices collapsed. Similarly, around half of our funds bought bonds and bank debt of stressed and distressed issuers during the sell-off in the credit markets early in the year. More recently, several Masters managers have acquired debt and equity securities of companies that are currently in bankruptcy or have recently emerged from bankruptcy.

Although several funds generated exceptional returns in 2016, Masters’ outperformance was broadbased. Nearly two-thirds of our funds beat the S&P 500. According to Morgan Stanley Prime Brokerage, the median return for global long/short funds in 2016 was 1%, and the top-quartile return was 7.2% or better. Of the 18 funds Masters was invested with for the entire year, 14 were in the top quartile and none were in the bottom quartile.

Masters’ best performing fund in 2016, PlusTick Partners, returned 56.2%. It entered the year net short energy companies, but pivoted during the sell-off, went long and profited handsomely. PlusTick’s purchase of distressed bonds at 40 to 50 cents on the dollar that rebounded to par by year-end, and its investments in equity and credit securities of bankrupt coal companies were positive contributors.

When PlusTick struggled in 2015, we considered the result to be consistent with the potential volatility of its investment program. Rather than mechanically redeem after the drawdown, we made a favorable forward-looking assessment, and our decision was rewarded this year.

Greenlight Masters

Mangrove Partners returned 50.9% for the year. The long portfolio and strong contribution from event-driven investments drove most of the performance. Early in the year, Mangrove bought distressed debt and equity of energy and materials companies during the sell-off in commodities. In certain instances the fund was actively involved in the restructuring of these companies. Positions including SunCoke Energy, Career Education and Cliffs Natural Resources that detracted from performance in 2015 were among the largest winners in 2016. Portfolio Manager Nathaniel August discussed Cliffs in Mangrove’s September letter:

It was incredibly gratifying to see one of our largest losers turn into a significant winner for the Funds due largely to our thesis being borne out. While we are certainly not always correct about the prospects for inexpensive and out-of-favor investments, when they do go right, the resulting profits are frequently substantial due to both higher earnings and a higher multiple.

Sessa Capital returned 34.1% to rank as our third best performer. The fund’s largest position, Chemours (CC), returned 317% in 2016 and was a key driver of results for the year. Sessa wasn’t the only Masters manager to find CC (spun off from DuPont in June 2015), as Greenlight Capital and 683 Capital also owned CC this year. We believe CC was the largest individual security contributor to Masters’ return in 2016.

Our seed investments in Firefly Value Partners and SQN Investors continued to sprout. Each manager performed well, and as a result of our shared economics generated additional return to Masters. Firefly returned 23.1% to Masters in 2016 led by long investments in natural gas companies, banks and industrial companies. Firefly’s largest position in 2016, an Appalachian natural gas and E&P company, Rice Energy, was its biggest winner.

In 2016, Firefly’s short portfolio saw 20 of its positions become “zeroes” through bankruptcy or massive dilution. Shorting potential zeroes is particularly challenging as these stocks often stage strong rallies (“draw-ups”) along the way. When Firefly examined all of its shorts that ended as zeroes, here’s what it found:

More than 70% of our shorts that have eventually hit zero saw their prices rise by at least 50% while we were short. Just under half of our zeroes have doubled at some point. A full 25% have tripled — or worse. Among all of our zeroes, the median draw-up is 96%, and the average is 143%.

Over its history, Firefly has had 124 shorts ultimately go to zero.

SQN returned 21.8% to Masters. Its concentrated long portfolio performed well with special help from the buyouts of inContact and Infoblox. Portfolio Manager Amish Mehta also added to core positions and selectively initiated new positions during the episodic sell-offs in tech. SQN launched in September of 2014 and began 2017 with about $250 million of assets under management.

In addition to fundamental investments, EcoR1 Capital also capitalized on tactical value-oriented opportunities (and generated good karma from fighting hazardous diseases). The biotech-focused fund made 13.1%, which stands out in light of the 21% decline in the NASDAQ Biotechnology Index (NBI). EcoR1’s success came from its short book, the IPOs of two gene editing companies, a private investment in a company with a multi-drug resistant anti-bacterial medication, and the opportunistic purchase of a block of stock in a small biotech company from a liquidating hedge fund.

North Tide Capital was down 3.2% in 2016 as good performance from its short book did not compensate for losses in long positions in a hospital company and a supermarket. Portfolio Manager Conan Laughlin is sticking to his fundamental value knitting:

We have closed out of all but two of our top 10 winners and at the same time we remain invested in every one of our top 10 losers… I think about it more that when the risk/reward computes, we play, and when it doesn’t we move on. Everything for us is based on risk and reward at the current price.

JMB Capital was down 3.4% last year as the portfolio’s generally bearish posture proved incorrect. Toward the end of the year, JMB announced it was returning outside capital to investors, which we received on December 31. We also redeemed our investment in Lakewood Capital. We enjoyed our five-year partnership with Anthony Bozza and his team, and we wish Lakewood continued success. In September, Masters invested in Prosight Capital, a healthcare-focused long/short fund. We first met Lawrence Hawkins, founder and portfolio manager, in 2013 after he presented at a small investor gathering in Dallas. We worked with Lawrence and his team to make an anchor investment in a new fund, Prosight Plus, which generally sizes positions at 1.5x their weight in the existing fund. Prosight Plus has returned 7.4% since we invested in September.

Prosight employs a methodical research process to identify companies that are mispriced relative to their fundamentals or undergoing significant changes brought about by regulatory, political, competitive, or product developments that commonly occur in the healthcare sector. At times, Prosight invests in companies selling below net working capital that have announced a disappointing clinical trial.

In October, Masters invested in Rubric Capital, a newly launched deep value hedge fund managed by David Rosen. David previously worked as a portfolio manager at SAC/Point72 for 10 years where he generated a strong track record. We have known David for many years and have evaluated his performance in a variety of market environments.

David believes changes in industry structure, new management, or business turnarounds can unlock significant shareholder value in unloved companies. The fund makes significant efforts to find alpha generating shorts, focusing on companies with challenged business prospects, pending legal or regulatory issues, or dishonest management teams. While Rubric is focused primarily on equities, it will opportunistically invest higher up in the capital structure. The portfolio is fairly diversified and typically maintains a low net exposure. Masters participated in the anchor investor class, which enjoys lower fees.

Masters also continues to benefit from reduced fees from our investment in Greenlight Capital, which remains below its high water mark. Following Greenlight’s 8.6% return to Masters in 2016, Masters will continue to pay a reduced performance fee on the next 50% of gross return. As a reminder, Masters does not charge a fund of funds fee to investors on its Greenlight Capital investment, which was 26% of the Masters portfolio as of January 1, 2017.

Masters’ direct portfolio contributed 0.7% of gross performance in 2016. We began 2017 with direct exposure of approximately 4% long and 4% short. As of January 1, 2017, Masters has investments with 18 managers. Greenlight Capital and the next five largest allocations represent 56% of our capital. The table below shows our managers’ returns, current allocation and recent exposures:

Greenlight Masters

Our goal is to find and invest with managers who we believe have the ability to compound capital at a high rate of return over long periods. We seek out managers who look for mispriced securities in all market environments, and we favor funds that can make money from shorting securities as well as from owning them. As the bull market enters its ninth year, Masters’ gross short exposure stands at 65%, the highest in recent history. Regardless of what transpires in 2017, we believe that Masters’ managers are well-positioned to capitalize and profit.

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” ? Mark Twain

Best Regards,

Greenlight Masters


1 Source: Greenlight Masters. Please refer to information contained in the disclosures at the end of the letter.


The information contained herein reflects the opinions and projections of Greenlight Masters, LLC and its affiliates (collectively “Greenlight Masters”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Greenlight Masters does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. Greenlight Masters has an economic interest in the price movement of the securities discussed in this presentation, but Greenlight Masters’ economic interest is subject to change without notice. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Information provided to Greenlight Masters by the relevant fund managers and used herein has not been independently verified by Greenlight Masters.

GREENLIGHT® and GREENLIGHT CAPITAL, INC. with the star logo are registered trademarks of Greenlight Capital, Inc. or affiliated companies in the United States, European Union and other countries worldwide. All other trade names, trademarks, and service marks herein are the property of their respective owners who retain all proprietary rights over their use. This communication is confidential and may not be reproduced without prior written permission from Greenlight Masters.

Performance returns reflect the total returns, net of fees and expenses, for an IPO eligible partner in each fund’s Series A interests as applied on a monthly basis pursuant to the confidential offering memorandum for a partner who invested upon inception. The inception date is January 2002 for Greenlight Masters Offshore, Ltd., and February 2002 for Greenlight Masters L.P. and Greenlight Masters Qualified, L.P. Performance returns are estimated pending the year-end audit. Past performance is not indicative of future results. Actual returns may differ from the returns presented. Each partner will receive individual statements showing returns from the funds’ administrator. Reference to an index does not imply that the funds will achieve returns, volatility or other results similar to the index. The total returns for the index do not reflect the deduction of any fees or expenses which would reduce returns.

Managers disclosed in the “2016 Performance and January 1, 2017 Exposures” table include Greenlight Capital and the next 5 largest weightings (excluding the Firefly SPV), in alphabetical order. All remaining managers and the Firefly SPV are aggregated under “Others”.

Weightings, exposure, performance contribution, and return on invested capital information reflect estimates calculated from data provided by underlying managers, and where appropriate, Greenlight Masters has used the weighted average of such figures for investments by Greenlight Masters Offshore, Ltd., Greenlight Masters Offshore I, Ltd., Greenlight Masters L.P., and Greenlight Masters Qualified L.P. Such information for underlying managers reflects, in certain instances, performance for a single class, single fund or limited selection of funds managed by the underlying manager notwithstanding the fact that Greenlight Masters may be invested in other share classes or funds managed by the underlying manager. Exposure information primarily reflects equity and corporate debt. Given differences in the classification used by managers and the varying transparency provided, certain assumptions have been made in the sole judgment of Greenlight Masters.

The positions reflected in this letter do not represent all the positions held, purchased or sold, and in the aggregate, the information may represent a small percentage of activity. The information presented is intended to provide insight into the noteworthy events, in the sole opinion of Greenlight Masters, affecting the portfolio.

THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT MASTERS OR ANY OF ITS AFFILIATES. SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR.

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