Perry Capital’s Top Bets As It Keeps Losing Money

Founded by Richard Perry in 1988, Perry Capital was considered one of the best event-driven hedge funds on the Street for more than two decades. However, the dismal performance of the fund in the last three years has severely damaged that reputation and also prompted investors to flee the fund in droves. According to Bloomberg, the New York-based hedge fund, which didn’t have a losing year until 2007, was down by 12.6% in 2015 and has lost a further 2.6% in the first seven months of 2016. Taking into account those losses, the fund has had a drawdown of 18.4% from the beginning of 2014 through July 2016.

For institutional investors such as pension funds who are more risk-averse than return-focused, the steep negative returns are a major blow. To understand how serious institutional investors are about not losing money, all one needs to do is take a look at what has happened to Perry Capital’s assets under management (AUM) in the last year. From managing $10 billion in assets at the end of last September, the fund now manages only $4 billion in assets as of the end of last month. In this article, we are going to take a look at the top-five stocks that Perry Capital was betting on going into the third quarter and will discuss how those stocks have contributed to the fund’s performance this year.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points in our backtests that covered the period between 1999 and 2012 (see the details here).

#5 Time Warner Inc (NYSE:TWX)

– Shares Owned by Perry Capital (as of June 30): 888,500

– Value of Holding (as of June 30): $65.34 million

Let’s start with Time Warner Inc (NYSE:TWX), in which Perry Capital reduced its stake by 8% during the second quarter. Shares of the cable giant have been on an uptrend since February and are currently trading up by over 21% year-to-date. For its latest quarter, Time Warner Inc (NYSE:TWX) reported EPS of $1.29 on revenue of $7 billion, topping analysts’ EPS expectations of $1.16, but missing their revenue target of $7.12 billion. On August 17, analysts at Loop Capital reiterated their ‘Buy’ rating and $96 price target on Time Warner Inc, which represents potential upside of 22.5%. At the end of the second quarter, there were 63 hedge funds that we track which had long positions in the company, with the aggregate value of their holdings amounting to $3.26 billion.

#4 Ball Corporation (NYSE:BLL)

– Shares Owned by Perry Capital (as of June 30): 2.69 million

– Value of Holding (as of June 30): $194.46 million

Though Perry Capital reduced its stake in Ball Corporation (NYSE:BLL) by 10% during the second quarter, the company moved up a spot to become its fourth-largest equity holding at the end of June. Earlier this year, the metal packaging manufacturing company revealed that it won U.S. antitrust approval from the FTC for its merger with Rexam, on the condition that the companies sell eight aluminum can plants. Ball Corporation (NYSE:BLL)’s stock spiked by over 15% on August 4 after the company reported its second quarter results and its shares are currently trading up by 6.38% year-to-date. While its revenue of $2.03 billion for the quarter missed analysts’ consensus estimate by $140 million, its EPS of $1.05 was $0.06 more than what analysts had expected. The ownership of Ball Corporation among the hedge funds in our system inched up by two to 42 during the second quarter, while the aggregate value of their holdings in it jumped by 44.5%.

We’ll see how Perry Capital’s top-three stock picks have performed on the next page.

#3 American International Group Inc (NYSE:AIG)

– Shares Owned by Perry Capital (as of June 30): 3.7 million

– Value of Holding (as of June 30): $195.7 million

Moving on, American International Group Inc (NYSE:AIG) was another stock in which Perry Capital reduced its stake during the second quarter, by 30%. The insurance giant lost a considerable amount of its market capitalization during the first-half of 2016, however its stock has recouped some of those losses in the current quarter and now trades down by 5.63% year-to-date. American International Group Inc (NYSE:AIG) was cornered by revered activist investors like Carl Icahn last year, who attempted to persuade it to break its businesses into three separate companies. Though AIG didn’t yield to that demand, it agreed to cut down its operating expenses and launched a massive $25 billion share repurchase program to keep the activists at bay. In order to raise money for that share repurchase program, the company agreed to sell its stake in United Guaranty Corporation last month for $3.4 billion in a cash-and-stock deal. During the second quarter, the ownership of AIG among the funds in our database declined by nine to 85 and the aggregate value of their holdings in it came down by $1.1 billion.

#2 AerCap Holdings N.V. (NYSE:AER)

– Shares Owned by Perry Capital (as of June 30): 5.92 million

– Value of Holding (as of June 30): $199.02 million

AerCap Holdings N.V. (NYSE:AER) was the only stock among Perry Capital’s five largest equity holdings in which the fund increased its stake during the second quarter, albeit by just 1%. Shares of the Ireland-based aircraft leasing company suffered an over 40% drop at the beginning of 2016, but managed to bounce back swiftly after that and are currently trading down by 6.63% for the year. On August 22, within two weeks of reporting much better-than-expected numbers for its fiscal second quarter, AerCap Holdings N.V. (NYSE:AER) announced that its Board had authorized a new share repurchase program of $250 million to run through December 2016.  This is the third time this year that AerCap’s Board has authorized a $250 million repurchase program, with the first one having been announced in February and the second one in May. On August 23, analysts at FBR & Co. reiterated their ‘Hold’ rating on the stock and set a price target of $40 on it. AerCap saw a major drop in its popularity among hedge funds during the second quarter, as there were 13 fewer long the stock, while the aggregate value of their AerCap holdings fell by over $400 million.

#1 Ally Financial Inc (NYSE:ALLY)

– Shares Owned by Perry Capital (as of June 30): 15.76 million

– Value of Holding (as of June 30): $207.15 million

Ally Financial Inc (NYSE:ALLY) continued to remain Perry Capital’s largest equity holding at the end of June, despite the fund having reduced its stake in the company by 31% during the second quarter. Other hedge funds that reduced their stake in the company during that time included Fortress Investment Group and Andy Redleaf‘s Whitebox Advisors. Shares of the bank and financial holding company have appreciated by nearly 6% so far this year,with most of those gains coming in the last two months. However, analysts who track the stock think that it is still trading at a deep discount to even the most conservative estimate of its intrinsic value. According to them, the stock could  have significant upside going forward as the company transitions to a bank model. Currently, 13 of the 17 leading analysts on Wall Street who track the stock have a ‘Buy’ rating on it. At the end of June, there were 49 hedge funds in our database with long positions in Ally Financial Inc (NYSE:ALLY), which held almost 16% of the company’s float in aggregate.

Disclosure: None