Bronson Point Partners 2014 Q2 investor letter revealed that Larry Foley and Paul Farrell‘s long/short equity hedge fund returned 3.4% during the first half of the year. It is true that the fund has underperformed the market and it has been underperforming the S&P 500 index since inception but we will explain why its returns are better than S&P 500 index’s returns. Before we share the details about the fund’s returns we’d like to remind that if you have access to other hedge fund investor letters you may be eligible to join our exclusive Hedge Fund Investor Letters Group. Here are a few excerpts from Bronson Point Capital’s 2014 Q2 investor letter:
“Bronson Point Partners and Bronson Point Offshore Fund (the Funds) gained 2.9% and 2.8% respectively for the second quarter of the year. For reference, the S&P 500 gained 5.2% in the second quarter of the year. For the quarter, the Funds’ realized volatility was 6.3% versus 9.4% for the S&P 500. Quarterly gross and net invested positions averaged 133% and 43%, respectively (88% long and 45% short). At June 30, 2014 the Funds were approximately 151% gross and 41% net invested (96% long and 55% short).
During the quarter, long positions added 4.5% to the Funds’ net performance on average gross long exposure of 88%, while short positions detracted 1.2% on average gross short exposure of 45%. Our long performance was roughly in line with the market during the quarter while our shorts added value based on our implied exposure, contributing to a positive return for the Fund. The Energy, Consumer, Industrials and Services sectors contributed positively to performance for the quarter. From a sub‐sector standpoint, the largest contributors to performance this quarter were Oil & Gas, Beverages and Media.”
As you can see S&P 500 index outperformed Bronson Point’s 2.9% quarterly return by 2.3 percentage points. Is this as bad as it sounds? The answer is no. Bronson Point was only 43% net long whereas S&P 500 index is by definition 100% long. If S&P 500 index was only 43% net long, its quarterly return would have been only 2.4%. This tells us that Bronson Point was able to generate an alpha of approximately 0.5 percentage points after fees during the quarter even though it underperformed the S&P 500 index by 2.3 percentage points. You shouldn’t compare a 40% net long fund to a 100% net long index. This is what most investors don’t understand and they are puzzled how hedge funds continue to raise capital despite “lackluster” performance.
Bronson Point Capital also returned 58.5% since its inception nearly 5 years ago. S&P 500 index returned 93.3% including dividends during the same period. Again, Bronson Point underperformed the index by nearly 35 percentage points. However, if S&P 500 index was only 45% net long, its cumulative return would have been only 42%. Bronson Point generated a cumulative alpha of 16 percentage points since inception. This isn’t a lot but we are pretty sure its investors are pretty happy about it. Bronson Point was managing nearly $2 billion at the end of June. If their investors weren’t happy, they wouldn’t have been able to raise capital.
We will cover Bronson Point’s stock positions and discussion of one of its largest positions in a separate article. You can visit our Bronson Point Partners page to read articles related to this hedge fund and check out its historical stock picks.