Opportunistic Credit Roundtable: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the Opportunistic Credit Roundtable featuring Emanuel Friedman of EJF Capital, Andrew Springer of Marathon Asset, Ronnie Jaber of Carlyle Group, and Avery Kiser of Neuberger Berman Alternatives.


Opportunistic Credit Roundtable

EF> Banking going through greatest changes since the 1930's.  Financials are being turned into utilities by turning them 100% capital requirements.  

AS> Regulation is creating dislocations in markets.  GSEs responsible for 90% of mortgage originations.

RJ> Direct lending is an area of opportunity.

EF> Change with Fannie and Freddie will be greatest change ever in mortgage market.

Moderator Mark Okada (Highland Capital) > How are people addressing rising rates?

AS> Hard to predict long end of curve.  Focusing on trends less impacted by long end of curve like distressed debt.  Likes credit.  Stay away from duration.

EF> Sees all as regulatory trade. Wants bank or insurance companies to buy it from them.

RJ> Technicals bad on high yield.  Likes floating and credit.  Munis are largely retail driven.  Lots of volatility and lack of strong bid.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

The Role of Volatility Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the Role of Volatility with a panel featuring Michael Schmanske of Glenshaw Capital, Christopher Cole of Artemis Capital, Zem Sternberg of Lake Hill Capital, and Joe Reynoso of Reynoso Asset Management.


The Role of Volatility

JC> Volatility is the new asset class.

JR> Used to be that the dumbest guy bought options, now that's not the case.  Options now efficient for hedging.  

ZS> Think of not as an asset class, but as a specialization.

JC> Government is the elephant in the room.

CF> Volatility has normalized.  QE has impacted pricing of tail risk.  Some think Fed can suppress volatility, thinks that is a myth.

JR> Seems like volatility is moving similar among asset classes.  Fed won't let market crash.

CC> Financial repression.

ZS> Brokers & Liquidity providers make money in options, those are the proven models.  Don't ignore the info the options market give, even if you don't trade it.

CC> Key is valuing the expectation of volatility.  Game theory is key.  Life is decay.  The more people short VOL, the more risk for a spike.

ZS> Think of options as insurance.  Move from Newtonian world to quantum mechanics.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Structured Credit Panel at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on structured credit featuring Richard d'Albert (Seer Capital, Christopher Hentemann (400 Capital), Amin Majidi (Premium Point Investments), and Rajesh Agarwal (Napier Park Global Capital).


Structured Credit Panel: Alpha Hedge West Conference

RD> Structured Credit now a sector in its own right for fixed income.  Usually accessed through private equity or co-mingled.

CH> Multi Sector structured finance.  RMBS, CMBS, CLOs, CDOs both US and Non-US.  Hedge fund and PE Style.  Looks for optionality and asymmetric risk.  More top down thematic.

AM> Residential only.  Over $2B in AUM.  Hedge and PE Style.  Fundamental analysis.  Credit risk and prepayment.  Mix of distress and new issue.  Beneficiaries of deleveraging on legacy side.  Before they had tactical investors looking for beaten stocks, now it is more strategic long term institutional investors.

RA> $6B in AUM.  Look at mortgage, Auto and credit card loan level data.  Have had a good run in mortgage.  Crash lead to short opportunity.  '09 and '10 long opportunity, '10, '11, and '12 refi opportunity.  IO's interest only mortgages.  Thinks IOs hedged for duration can be double digit.

DS> Impact of rise in rates?

AM> June was kick off of rate rise.  Rising rates has created opportunity in credit bonds.  Rising rates good for credit bonds at top of structure.  Must do homework.

CH> Markets are cyclical.  Going from low rates to high rates.  Rates will rise.  Will create volatility.  Need volatility sensitive structure.  Want Vega.  Be short duration.  Here you don't have to just shorten duration, can actually go short duration.  Overall tone is positive.  GDP is up.  Housing up.  Credit spreads likely to contract.  Assets that benefit from steeper yield curve.

RD> Banks no longer buyers in space.  Less liquidity, but more opportunity.

AM> New environment very good for improving credit quality in underwriting.  Only like hedge investors can buy.  Rating agencies also very conservative now.  Regulation hurting bank balance sheets.  Opportunity to buy mortgages is sustained.

RA> Not enough capital available for subordinated structure.  Newly issued debt easier to understand.

What keeps you up at night?

AM> Home prices.  Buy protection with out of the money puts.

RA> Affordability stands around 150.  Number was 200.  Further backup in rates will hurt prices.  Lots of cash buyers have been in, giving run up in home prices.  They may not be around going forward.

DS> Private Label MBS

CH> Loans more than $417K for Fannie and Freddie.  Market mostly has been closed.  Over 90% of loans are Fannie and Freddie.  Low home prices have also reduced need for jumbos.

AM> Freddie now releasing loan level data on loan performance.  Great for doing analysis.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Dynamic Investment Panel: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the dynamic investment panel featuring John Claisse of Albourne America, Joy Xu of Verizon Investment Management and Andrew Karsh of CALPERS.

Comments below: JC = John Claisse, JX = Joy Xu and AK = Andrew Karsh


Dynamic Investment Panel: Alpha Hedge West Conference 

MD> Just because you got away with it doesn't mean you didn't take a risk.  Missing 40 worst days more than two times better than getting 40 best days.

JX> Ben Graham said investors need to manage "risk" not "returns".  Risk premium not static.  If you put $1M into market for 20 years each year from '28 to '93, the range of outcomes is between roughly $650K and more than $13M.  Very wide range.  Not losing money is key.  Liquidity is never there when you need it.  Risk premium, not stable, in other words, bonds have frequently outperformed stocks.

AK> $260B in AUM.  Bonds allocated internally.  Real estate and hedge funds managed externally. Goal of 7.5% returns.

JC> Lots of turnover at Board and Trustee level.

SB> Manages about $7B AUM.  Good Harbor Financial.  If they like risk they go equity, don't like risk they go fixed income.  Better to be out of market worst 10 days than in 10 best days.  Is currently 50% stocks and 50% bonds.  Neutral.

JX> They use models or internal management.

AK> Allocates to partners that generates absolute returns vs relative and better dialogue vs normal hedge fund process.

JC> Smaller managers, if they get standard info on active risk taking by global, macro, etc.  They can use that info and insight.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Next Generation of Hedge Fund Managers: Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on hedge fund leaders of the future: the next generation.  It featured Michael Sedoy (Kimmeridge Capital), Neal Shah (Valtura Capital), Mike Keough (Racon Capital), John Rende (Copernicus Capital).


The Next Generation of Hedge Fund Managers 

In 2012 roughly 1,200 hedge funds tried to start and only 35 had over $100M in AUM.

JR> At Weintraub he did health care and overlaid technical analysis and options.

MK> What learned, what he'd do now:  Experienced team of people working together.  Underestimated what it meant to create a portfolio from scratch.

Moderator> How about the business side?

MK> Believing you need to have separation between the business side and the investing side.

MS> Has COO.  In terms of 3rd parties, has only gold plated servicers.

Moderator>24 of the 35 funds had seed deals.  1.5% and 15% for founder deals.

JR>The founders class is 1% and 15% up to $75M.

MK> Feels good about the economy.  Feels next Fed chair will dictate monetary policy for US and World.  Likes short volatility and most carry strategies.  Higher rates off the table with Summers gone.

NS> Likes some Puerto Rico Munis.  Small Market Munis blowing up.

MK> VIX is 4 points over normal historical trend.

MS> Shale.  People were doing well during rise in energy prices.  Last three years has been becoming about finding high margin energy.  North American unconcentrated.

NS> Events they look for are panic.  Credit Stress, BK, Spins, Div Cuts, etc.  Prefers not to be activist.  95% of the time, mgmt is reasonable.  5% of the time, fixed agent is running cargo for itself.  

JR> Old fund had Vol of half the S&P.  This new fund will have more.  Will use lots of similar tactics.

MK> Weak portfolio that recognizes different asset classes react to volatility.  In May he was long copper and short Aussie dollar and Chile Peso.  Really likes airline stocks.

What Keeps You Up At Night?

JR> Time horizon different between the investor and fund manager.

MK> Difference between correlation and causality.

NS> Amount of money chasing corporate credit.

Other Comments

NS> Smaller funds can buy cheaper muni issues discounted in Puerto Rico compared to what others would be in bigger funds.

JR> Need to have people feel empowered.  Need to have decision capabilities.

Moderator> What is Emerging Manager?  Spinoff or Spinout?  $1B to $2B in AUM?  Minority Owned?

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Where Is Venture Capital Investing Now & Why? Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel on venture capitalists and where they're investing now and why.  It featured Chris Schultz (Operating Venture Capital), David Girouard (Upstart), Ari Levy (Bloomberg), Ron Suber (Prosper Marketplace), Pat Grady (Sequoia Capital).


Venture Capital Panel: Where Are They Investing Now & Why?

PG> Like industries with high rate of change.  Tech now creeping everywhere.

??> Moving from computing creating stage to computing development state.  Less focus geographically.

??> VCs look for people.  That's key.

PG> New enterprise software companies like Splunk, Workday, Palo Alto Networds, etc. will steal share from large old software tech, SAP, Microsoft, Oracle, etc.  People in private investment that are successful in private corps is because of long term thesis and understanding of future trends.

PG> Does not like Venture Debt.

PG>On paper Bitcoin is incredible.  Issue is overcoming inertia.  Potential is huge.

RS> On Prosper: Use 500 data points to underwrite borrowers.  Kickstarter is for equity.

On Upstart

New Oregon bill where 3% of income paid next 20 years instead of student paying tuition.

Predictions for huge business future

RS> Sending emails in future.

PG> Mongo DB, goes from stuctural database to unstructured.

DG>  Driverless cars will reshape need to own cars.  No need to own, car can just get you.  No need for garage.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Value Investing Congress Notes: New York 2013

Below are notes from the 2013 Value Investing Congress in New York from both days.  Click the links below for each speaker's presentation:


Value Investing Congress Notes: Both Days


Jeff Ubben (ValueAct): Long Willis Group (WSH)

Jeffrey Smith (Starboard Value): Long Wausau Paper (WPP)

Mick McGuire (Marcato): Long United Rentals (URI)

Cameron & Tyler Winklevoss (Winklevoss Capital): On Bitcoin

Donald Yacktman (Yacktman Funds):  Process & market thoughts 

Alex Roepers (Atlantic Investment Management): His 5 new ideas 

Guy Gottfried (Rational Investment Group): 2 Canadian longs

Michael Castor (Sio Capital): Various healthcare plays

John Mirshekari (Fidelity Investments): 2 investment ideas

Chris Mittleman (Mittleman Brothers): Azteca, CMIC Holdings

Clifton Robbins (Blue Harbour Group): Chico's (CHS)

Mark Boyar (Boyar Value Group):  Long Madison Square Garden (MSG)

Joe Altman & Chris Kyriopoulos (COMPOUND): Long Ascent & Covanta

Harvey Sawikin (Firebird Management): Long Gazprom Neft

Rahul Saraogi (Atyant Capital): On India

Charles de Vaulx (IVA): Market thoughts

Whitney Tilson (Kase Capital): Short K12 (LRN)

Daniel Miller (Gabelli Focus Five): 3 ideas 

Evan Vanderveer & David Shapiro (Vanshap Capital): 2 investment ideas

Carl Chen & Tom Lu (Temple Honor Asia): 2 stock picks

Chris Mayer (Capital & Crisis): Various bank picks

Value Investing Challenge Winner: Long Ashland (ASH)

Value Investing Challenge Runner-Up: Short Life Lock (LOCK)

Jeff Smith's Presentation on Wausau Paper: Value Investing Congress

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Jeffrey Smith of Starboard Value.  He's an activist investor and talked about Wausau Paper (WPP).


Jeffrey Smith's Value Investing Congress Presentation

Wausau Paper (WPP)

Maker of toilet paper and paper towels.  He says everyone needs toilet paper.  Significant opportunity to dramatically increase cash flow through better execution.  Wants the company to change its name and return cash to shareholders.

He likes that it generates strong cashflow and almost acts like an oligopoly in local areas.  They focus on office toilet paper & towels.  Starboard owns a 15% position and wants the company to cost-cut and grow in order to then do a big buyback and dividend.

He said he can't talk Smithfield.  Starboard is seeking to vote down the buyout of the pork company.


Be sure to check out the other presentations from the New York VIC here.

Whitney Tilson Short K12: Value Investing Congress Presentation

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Whitney Tilson of Kase Capital.  He presented a short of K12 (LRN).


Whitney Tilson's Value Investing Congress Presentation

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Short K12 (LRN)

His largest short position.

Near its all-time high.

Says shorts have cost him and his investors "a fortune" over the past 4 1/2 years. 

Online learning in 33 states. 

Bull case:  32% revenue growth over last decade, expected to grow another 16% revenue and 32% eps over next year.  Ave rev/student rising.  High parental and student satisfaction.  He admits online education can be an excellent option for some students.  Product is fine, not a fraud. 

 

Valuation short, basically.  Trades at 50x earnings, but growth is now slowing, and EBITDA margins are under pressure. (Looks seasonal though?).  Asks why they don't use a big accounting firm.   

Aggressive accounting to capitalize its software and curriculum development costs.  Says shift is to a growth at any cost mentality.  Says their pass rates are getting worst, because they are taking more at-risk kids.  

Embedded below is the .pdf of Tilson's slideshow on K12 (LRN): 

 
 

Be sure to check out the other presentations from the New York VIC here.

Charles de Vaulx's Value Investing Congress Presentation

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Charles de Vaulx of International Value Advisers.


Charles de Valux's Value Investing Congress Presentation

They're very cautious right now: "never been as cautiously positioned."  He feels US stocks are fully priced right now.

They've reduced their gold position as well.  He's worried a lot about China and says it's a big question mark.   However, he thinks Japan is cheap mainly due to corporate governance.

He emphasized minimizing losses as a key to compounding wealth.

His idea was Millenium & Copthorne Hotel which he says has been disregarded since it's not a pure play on Asia, Europe or Americas.  


Be sure to check out the other presentations from the New York VIC here.

Rahul Saraogi's Presentation on India & NMDC: Value Investing Congress

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Rahul Saraogi of Atyant Capital (India).  He presented "They Came. They Saw.  They Hesitated.  Making Sense of the India Opportunity."

Rahul Saraogi's Value Investing Congress Presentation

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Five years ago, a man coined the term BRICs. Since then, 5 year BRICs performance. SPX did the best!

Why is India doing poorly?

Poor sentiment. Capital investment has collapsed. It's easier to raise funds for his India fund when the person hasn't visited. He says it's a terrible place to visit. CAPEX has plummeted.  Policy paralysis. Nonexistent government.

India positives: democracy, depth of markets, demographics.  India negatives: government and policy.

No hope for improvement now.  Retail got wiped out in 2008 and insurance regulations hurt annuities.

Long NMDC

Traded on the Indian exchange.  Iron producer in India, majority owned by Indian govt.

Be sure to check out the other presentations from the New York VIC here.

Mark Boyar's Presentation on Madison Square Garden (MSG): Value Investing Congress

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Mark Boyar of Boyar Value Group.  He pitched Madison Square Garden (MSG) as a long.


Mark Boyar's Value Investing Congress Presentation

Long Madison Square Garden (MSG)  

He sees MSG worth $84 and they won't be forced to move the Garden since they own the building and have little incentive to move.  He feels the real estate around the area will eventually increase in value.

Also, he wants the board to repurchase shares and issue a dividend since it generates around $300mm in cash every year.  Boyar also noted that MSG shareholders could benefit if the Dolan family were to take MSG private.


Be sure to check out the other presentations from the New York VIC here.

Value Investing Challenge Winner: Long Ashland (ASH)

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is the Value Investing Challenge winner.  Daniel Lawrence of Elmrox Investment Group pitched Ashland (ASH) as a long.


Daniel Lawrence's Value Investing Congress Presentation

Long Ashland (ASH)

Specialty chemical company.

"Misunderstood transformation with significant upside and catalysts."

Used to be commodity chemicals company, and is now a specialty chemical company.  Street is not valuing it for that yet.  Says stock doubles from here.

Owns Valvoline- he says high barrier to entry, but low maintenance CAPEX, less than 2% of sales.

Product portfolio is differentiated, high loyalty rates by consumers.  Market giving no credit for Valvoline, effectively getting it "for free."

Says multiple expansion as market recognizes the transformation.

Why it's cheap?  Street thinks they will make more big acquisitions.  Oil exposure, weak cash flow, underfunded pension. 

Be sure to check out the rest of the presentations from the Value Investing Congress here.

Value Investing Challenge Runner-Up: Short LifeLock (LOCK)

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is the runner-up in the Value Investing Challenge competition.  David Swartz of Pacific West Land pitched a short: Life Lock (LOCK).


David Swartz's Value Investing Congress Presentation

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Short Life Lock (LOCK)

Claims to protect against identity theft.  He says they are misrepresenting their ability to protect against identity theft.  Weak product, not useful, basic product, 73% of members, doesn't even do credit report checks.  $10/month basic service has no credit monitor.

 

One of the founders had his identity stolen several times.  Own father accused him of using his AMEX to run up $150k in charges.  Name does not even appear in Life Lock’s prospectus.  Bankruptcies, lawsuits, failed businesses, etc.

 

The very origin of the company is a fiction.  CEO: Todd Davis, co-founder.  Put his own SSN in ads, his identity has been used in 13 separate incidents.  He's been selling stock every month. 

LOCK just bought ID Analytics, paid $186M in cash, for 7x revenue.  Business is unprofitable. 

LOCK has $1.3B market cap, 22x BV, 38x P/E forward eps.  Spending $170M on sales and marketing.  Has a public comp, INTX.  Its TEV/sub is only $39 vs. LOCK of $393. 

Price target: $5.

Be sure to check out the other presentations from the New York VIC here.