Although it looks like things are finally changing, it’s been a difficult few years for short-sellers. Many hedge funds which previously had a short bias abandoned their positions because of how difficult it had become to win on the short side. However, a few funds managed to generate positive returns on their short books even during a time of strong momentum, and Blue Hawk was among them in the second quarter.
Blue Hawk outperformed
ValueWalk recently obtained a copy of Blue Hawk’s Q2 letter, and it revealed a total net return of 4.92%, compared to the S&P 500’s 2.93% gain and the Barclay Hedge Fund Index’s 1.18% increase in the same period. For the first half of the year, the fund returned 12.33%, beating the S&P’s 1.68% gain and the Barclay Hedge Fund Index’s 0.98% gain for the first six months of the year.
Blue Hawk's long book posted a gain of 5.96% for the second quarter and a gain of 11.81% for the first six months of the year. The fund's short book gained 0.5% in Q2, significantly outperforming the Proshares Short S&P 500 Index, which lost 3.2% during the quarter. For the first six months, Blue Hawk's short book gained 4.63%, compared to the Proshares Short index's decline of 1.2% in the same time period.
Blue Hawk rode the wave of momentum in Q2
At the time Managing Member Jake DuBois wrote Blue Hawk's Q2 letter in July, he felt equities were still undervalued, especially high growth stocks. He felt that interest rates should be factored in which comparing stock prices "across different stock market regimes." He also felt that value stocks looked expensive at the time while high growth stocks looked cheap.
A look at the biggest contributors for the fund's second-quarter returns reveals a strategy in keeping with the broader momentum of the market. Blue Hawk's biggest contributor was Facebook, which added 2%. The stock gained mightily during Q2, although it has struggled most of the year, weighed down by the data privacy scandal. Electronic Arts and Netflix were the next two biggest contributors with gains of 1.4% and 1%, respectively. Other key names on the list include Microsoft and Citrix.
We must point out that Blue Hawk does not state clearly whether these positions are longs or shorts in the Q2 letter, but clearly most, if not all of them, must be longs. It would be interesting to find out which shorts worked for them in the second quarter, given how difficult it was for short-sellers to post positive returns at that time.
On the losing side for Q2, Blue Hawk had Match Group, Xylem, Sodastream and Constellation Brands.
Blue Hawk initiates in TD Ameritrade and TripAdvisor
During the second quarter, Blue Hawk bought into TD Ameritrade and shifted its PayPal position into Visa. The fund also added TripAdvisor and increased its position in Electronic Arts. Blue Hawk cut back on its stake in Sherwin Williams as well.
As far as the fund's short book goes, DuBois said they "leaned into" two of their shorts in the software and services sector. One is described as a "large IT Services company," while the other is named as a social media company. Blue Hawk did not identify either of them and didn't provide enough detail for us to take a guess. The fund also initiated a new short position in semiconductors, but again did not provide further details. Blue Hawk had been shorting Symantec but covered the position during Q2.
This article first appeared on ValueWalk Premium