GSE Preferreds Drive Gator Financial’s 20% Return In Q1

More and more hedge funds are releasing their March and first-quarter return sheets, and one we’ve been watching is Gator Financial Partners, which has benefited from the rally in GSE preferred shares. Gator was down a bit in March as Fannie’s and Freddie’s preferred shares pulled back, but March’s decline wasn’t enough to do anything more than put a small ding in the fund’s Q1 returns.

Gator is up 20% for Q1

In his March return sheet, which was reviewed by ValueWalk, Portfolio Manager Derek Pilecki said Gator was down 2.6% for March. Including January’s impressive 17.76% gain and February’s strong 4.44% gain, the fund is up 19.78% for the year so far.

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Gator is a long/ short equity fund focused on the Financials sector. The goal is to capture returns which are "independent of the market direction of the Financial sector." Pilecki builds the portfolio through bottom-up fundamental research and focuses on small- and mid-cap companies with less sell-side research coverage.

Gator captures gains in GSE preferreds

The fund's top five long positions are Zions Bancorporation stock and warrants, Syncora Holdings, GSE Preferreds, Ambac Financial Group and SunTrust Bank. GSE preferreds were 10.17% of the fund's net asset value as of the end of March. While the other top positions obviously also contributed to Gator's Q1 returns, it's pretty clear that GSE preferreds offered significant upside.

Fannie Mae and Freddie Mac's preferred shares both pulled back in March, but they're off and running in April again, so we would expect solid returns again from funds like Gator with significant stakes in one or both of them. We should also point out that as of the end of March, Muirfield GSE Partners was listed as the top hedge fund in Hedge Weekly for the week of April 8 with a year-to-date return of 45.86%. The Muirfield team said in a recent letter that they think GSE preferreds are worth $25 per share.

Looking at Gator's other top holdings, Zions pulled back quite a bit in March, falling from the $50-per-share range to about $45 per share. We noticed a similar pullback in SunTrust Banks as well, which fell to around $58 per share after trading as high as $66 in March.

This article first appeared on ValueWalk Premium