The manager of one of this year’s top performing hedge funds is becoming increasingly bearish as the year progresses.
Ricky Sandler, whose Eminence Fund gained 22 percent net of fees through the first three quarters of 2012, told clients in his most recent quarterly letter that his fund’s net equity exposure is just 37 percent. This is down from an average of 43 percent in the third quarter, when the fund rose 6.7 percent. The fund’s current exposure is now 10 to 20 percentage points lower than it has been over the past year and is on the lower end of its long-term historical averages.
“This reflects a tepid view of earnings prospects combined with the more positive sentiment we see among other investors,” the firm wrote in the letter, dated November 1. “It is also largely the result of the stock by stock decisions we are making each day versus any particularly bearish viewpoint we hold.”
Meanwhile, the letter stated that the firm is looking to raise more money for its hedge funds and long-only fund.
The letter, written six days before Election Day, said the fiscal cliff and uncertainty over the election were more reasons to be cautious. The firm did single out some positive offsetting factors, including the potential stabilization of economic activity in China and Europe and sustained strength in the U.S. housing market.
Obama’s victory probably didn’t make Sandler any more hopeful, given that he told clients a Romney victory could spark what he called the “self-reinforcing recovery we all have been looking for over the past three years,” which he believed would lead to materially more confidence among corporate executives.
To express his bearishness, Sandler holds a 10 percent short position each in French and Spanish sovereign debt, asserting that their current low yields make them an inexpensive hedge. As he noted, “the outcomes in Europe are far from settled.”
He also owns options to bet on rising 30-year interest rates in the U.S., noting that the Fed’s aggressive policy is eroding the value of fixed income investments. He also stresses that very low long-term interest rates help to boost stock prices.
On the long side, in the past quarter or so Eminence has taken new positions or aggressively expanded previous positions in the Vodafone / Verizon pair trade, Advance Auto Parts, B/E Aerospace, AIG, State Street, ASML, Owens Illinois, Britvic and InterXion.
At the same time, the fund has sold or aggressively pared positions in Abbott Labs, Lam Research, Equinix, Sprint and Citicorp. It also trimmed its Google stake to what it calls “a more traditional large position size.” Keep in mind Google added more than 4 percent to the fund’s returns in the first nine months. In addition, now that Tyco has broken into three businesses, Eminence has singled out the fire and security segment now known as “the new Tyco.”
In the pair trade, Sandler is long Vodafone and short Verizon, two companies that share common ownership of Verizon Wireless. Vodafone owns 45 percent of Verizon Wireless and Verizon owns the other 55 percent. Sandler points out that Vodafone trades at a significant discount to Verizon, so it creates an intriguing arbitrage opportunity since investors are valuing the same asset very differently.
In any case, Eminence’s top 10 positions represent 40 percent of equity. They are: Google, CME Group, eBay, Vodafone, JPMorgan Chase, Adobe Systems, Genpact, Fiserv, Copart and Sirona Dental Systems.
Meanwhile, Eminence is looking to boost assets. It told clients it is still interested in pulling in an additional $500 million of net capital for its hedge funds. It also recently opened its long only funds to outside investors.
Sandler is one of two sons of one-time hedge fund whiz Harvey Sandler to be working in the alternative investment business. The other is Andrew Sandler, managing director/portfolio manager and head of hedge funds at Sandler Capital Management, the firm his father had earlier founded.
Ricky Sandler founded Eminence in December 1998 and now runs more than $3 billion. In 1994, he had launched Fusion Partners with Wayne Cooperman — now of Cobalt Partners and the son of Omega Advisors’ Leon Cooperman — before they split to run their own funds.