Kevin Ulrich’s and Anchorage Capital Partners‘ 2014 Q2 investor letter is out. Anchorage Advisors is one of the large but unknown hedge funds with strong returns. The credit, special situations, and distressed debt hedge fund returned 8.7% during the first half of 2014. Kevin Ulrich and Anthony Davis’ hedge fund also returned 20.9% in 2013 and 16.4% in 2012. The fund had $14.7 billion in assets and 60 investment professionals managing them at the end of June 2014. Anchorage Capital had 70% of its long positions in North America and 30% in Europe. The fund’s net exposure was 59%. We will share a few excerpts from Anchorage Capital’s investor letter. Please get in touch with us to learn how you can join our exclusive Hedge Fund Investor Letters Group.
“Through the first half of 2014, Anchorage Capital Partners Offshore was up over 8.7% net of fees. The Fund’s positions continue to perform well based upon company-specific events and market conditions conducive to positive catalysts. The result has been a high quality return stream that has registered gains even across recent equity market selloffs. For example, since the beginning of 2012 the S&P 500 has experienced negative performance in 6 of 30 months. ACPO produced an aggregate return of +3.30% in those months versus -15.21% for the S&P 500. This differentiated performance helps demonstrate the idiosyncratic profile of the Fund’s core positions, as well as their inherent downside protection due to generally lower leverage profiles and strong free cash flow.
The main driver of performance this quarter was the Fund’s post-reorganized equity and structured credit positions, which were primarily established during the last distressed cycle. A recovering macroeconomic landscape, constructive sectorspecific developments and increasing mergers and acquisitions activity not only drove price appreciation, but also supported the harvesting of our legacy positions. Year to date, we have harvested more than $1.5 billion across the Fund, at levels accretive to performance. Much of this harvesting came from monetization of legacy structured credit and the postreorganized equity portfolio through IPO or sale processes. We anticipate significantly more monetization activity to come over the next 12-24 months.”
In addition, the Fund generated positive performance through redeploying harvested capital into new investments, and remains fully invested. Relatively recent additions to the portfolio in performing credit, distressed debt and special situation equity were important contributors to quarterly returns. Over the quarter, we were able to work exclusively to source, structure and execute new transactions, as a result of both the strength of Anchorage’s relationships and our ability to underwrite complex investments across the capital structure. Of the Fund’s 10 largest positions at quarter end, 5 were new to the top 10 over the last 12 months. These positions alone accounted for roughly half of the Fund’s quarterly performance.”
Anchorage Capital’s stock largest positions at the end of the second quarter include Houghton Mifflin (HMHC), Cheniere Energy (LNG), and Central Pacific Financial Corp (CPF). You can check their current and historical portfolios here. Kevin Ulrich and Anthony Davis also shared their outlook for the rest of this year:
“We expect many of the factors that have contributed to the Fund’s performance in the first half of the year to benefit the Fund in the second half as well. Improving economic fundamentals and increasing mergers and acquisitions activity from both financial and strategic sponsors should support the harvesting of our reorganized equity positions. The majority of our distressed investments remain to be harvested and the potential for future activity is strong, which should lead to additional positive performance. We intend to continue to maintain significant short credit exposure, which aims to dampen performance volatility during market selloffs and effectively positions us to add risk when other market participants are selling. Given the breadth of our platform, the flow of new investment opportunities is more than keeping pace with monetizations.
As we look forward in a market environment where investors are generally seeking to minimize exposure to both long and short credit beta, we believe the Fund’s legacy exposure, coupled with our ability to be active and tactical during market dislocations, should continue to yield a return stream that is higher in quality and differentiated in nature.”