Broyhill's Affinity Hedge Fund: Contrarian Bet on Long-Term Treasuries (Investor Letter) ~ market folly

Wednesday, May 12, 2010

Broyhill's Affinity Hedge Fund: Contrarian Bet on Long-Term Treasuries (Investor Letter)

In a continued effort to expand our hedge fund coverage, we're always on the lookout for intriguing insight from 'under the radar' investment managers. As such, today we present you with market commentary and investment ideas from Broyhill Asset Management's Affinity hedge fund. Broyhill started as a family office managed by Paul H. Broyhill and has developed a long-term investment philosophy focused on capital preservation first and foremost. In their first quarter investor letter, we see they were right on the money recommending a cautious stance. As we all know, last week marked a precipitous drop in the market via the flash crash. To arrive at such a viewpoint, Broyhill used contrarian indicators such as the CBOE equity put/call ratio as well as extreme magazine covers & headlines. These are some of the same signals we pointed out in Jeff Saut's sell in May and go away missive.

To get a better idea as to Broyhill's investment exposure, let's take a look at their latest portfolio. Do you like going against the crowd? Well then you've certainly come to the right place. While numerous hedge funds (a.k.a. the crowd) have been shorting long-term treasuries, Broyhill is bullish on long-term treasuries and it marks their largest exposure today. Chief Investment Officer of their Affinity hedge fund, Christopher Pavese, wrote in a past commentary that, "It is important to note that in the near term, the contraction in private section credit combined with the threat of fresh credit concerns ahead, will likely keep a lid on inflation pressures. This view is perhaps where we differ most from today's consensus thinking, where many expect an immediate and permanent increase in inflation levels. We aim to capitalize on this departure from consensus later in the year, but importantly, the difference is simply one of timing."

Well for them, 'later in the year' quickly became 'now'. Investors flocked to safety in US treasuries during the flash crash last week and Broyhill expects the move out of risk assets and into government bonds to accelerate. Again this marks a contrarian stance as we recently saw global macro hedge fund Prologue Capital outline why macro factors are positive for risk assets. Broyhill has clearly taken a converse view. We like to present both sides to a compelling argument and Broyhill has certainly helped us in that regard. Interestingly enough, Chief Investment Officer Chris Pavese notes that they were previously short treasuries but covered in late march and then became buyers. Keep an eye out later today as we'll be posting up a separate piece from Broyhill outlining ten reasons to buy bonds.

Turning to equities, we also got a recent look at their top ten holdings, listed below:

1. St. Joe Company (JOE): 4.3% of assets
2. Wal-Mart Stores (WMT): 4.2%
3. Vodafone (VOD): 4.1%
4. Microsoft (MSFT): 4.0%
5. Kraft Foods (KFT): 3.9%
6. Nintendo (NTDOY): 3.8%
7. Humana (HUM): 3.6%
8. iShares Silver Trust (SLV): 3.3%
9. Market Vectors Gold Miners (GDX): 3.3%
10. ConocoPhillips (COP): 3.1%

As you can see, Broyhill favors high quality names which is in line with numerous other hedge funds. As we've detailed before, David Einhorn of hedge fund Greenlight Capital is bullish on Vodafone, Bill Ackman of Pershing Square had assembled a large Kraft position, and numerous hedge funds have added Microsoft shares, citing undervaluation. So while Broyhill has gone against the crowd with their treasuries play, they are certainly with the crowd in the equity arena.

We also got a recent look at some of Broyhill's short exposure. Like the majority of hedge fund land, they are keeping individual names close to the vest, but they have listed their top sector shorts:

Education (9.6)% of assets
Automotive (4.1)%
Recreational Vehicles (3.9)%
Business Equipment (3.9)%
Global Financials (3.9)%

This information is intriguing because they clearly have a large bet against education related stocks, a sector many Tiger Cub hedge funds have been quite bullish on. David Stemerman's hedge fund Conatus Capital had been long education plays but then sold out of them. We'll have to keep an eye on that as it has become a sector ripe with difference of opinion. Overall, Broyhill is 75.3% long and 44.7% short, leaving them 30.6% net long. This falls directly in line with what we've seen recently as hedge funds have reduced equity exposure.

In currencies, Broyhill has been long the Renminbi and short the Euro and the Yen. This again coincides with what we've seen in terms of hedge fund currency exposure. In commodities, Broyhill is long gold 9.6%, long oil 4.6%, and short copper -4.4%. Embedded below you will find their latest market commentary via Broyhill's first quarter 2010 letter:

You can download a .pdf here.

Intriguing stuff from Pavese and Broyhill and we'll certainly keep an eye on their contrarian wager. We've been covering a lot of excellent hedge fund commentary as of late and we posted up the following investor letters which we highly recommend reading:

- Louis Bacon's global macro fund Moore Capital Management
- Ricky Sandler's Eminence Capital
- David Einhorn's latest Greenlight Capital commentary
- Jay Petschek's Corsair Capital investor letter

Check back each day as we continue to chronicle what some of the most prominent hedge funds are up to.

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