This Hedge Fund Just Made A Massive Bet Against the SPY

Boston-based hedge fund Fort Warren Capital Management is predicting a doomsday scenario for equities in the coming months, if one goes by the latest 13 filing it has submitted with the SEC. Founded by Eugene Lee and Paul Singh in July 2014 with $200 million in assets under management (AUM), Fort Warren boasted regulatory AUM of $376 million at the end of March. Prior to founding Fort Warren, both Mr. Lee and Mr. Singh worked as senior analysts at Regiment Capital Advisors until 2013.

The latest 13F filing of the fund for the quarter ending September 30 is a shocker considering that the value of its equity portfolio increased by more than six-fold during the third quarter to $655.47 million from $95.66 million at the end of second quarter. Moreover, more than 80% of the value of the fund’s equity portfolio was amassed by a single bearish bet on the SPDR S&P 500 ETF Trust via Put options. In this post, we are going to take a look at the five major moves made by Fort Warren Capital Management during the third quarter.

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Whiting Petroleum Corp (NYSE:WLL)

Let’s start with Whiting Petroleum Corp (NYSE:WLL), a position that Fort Warren liquidated during the third quarter, having initiated it just a quarter earlier. The independent oil and gas company has lost almost 90% of its market capitalization since mid-2014. Although its stock saw a strong rally between March and early-June of this year, it has given up most of those gains since then and now trades down by 13.03% year-to-date. For its third quarter, the company recently reported a massive decline in its revenue owing to a decline in production after the sale of its higher-cost assets. However, analysts see this sale of higher cost assets as a positive move by Whiting Petroleum Corp (NYSE:WLL), as its Lease Operating Expenses fell to $7.98 per barrel of oil equivalent (BOE) during the quarter and have the potential to decline even further given that the company is now focusing on drilling more efficient wells in the Williston and Redtail basins.

Calpine Corporation (NYSE:CPN)

Calpine Corporation (NYSE:CPN) was another stock in which Fort Warren Capital Management sold off all of its shares of during the third quarter. At the end of June, Calpine Corporation (NYSE:CPN) was Fort Warren’s ninth-largest holding, worth $3.03 million. Another hedge fund covered by us that sold its entire stake in the company during the third quarter was Matthew Tewksbury‘s Stevens Capital Management. Calpine’s stock has been on a downward journey since early-June and has lost over 23% of its value so far this year. On October 28, the company reported its third quarter earnings, declaring EPS of $0.83 on revenue of $42.36 billion versus analysts’ expectations of $0.59 in EPS on revenue of $42.14 billion. That earnings and revenue beat prompted analysts at Deutsche Bank to up their price target on the stock to $19 from $17 on October 31, while keeping their rating on it unchanged at ‘Buy’.

We’ll check out three of the fund’s top stock picks on the next page.

KAR Auction Services Inc (NYSE:KAR)

– Shares Owned by Fort Warren Capital Management (as of September 30):117,596

– Value of the Holding (as of September 30): $5.07 Million

KAR Auction Services Inc (NYSE:KAR) was a new entrant into Fort Warren’s equity portfolio during the third quarter. Shares of the wholesale car auction services provider were on a consistent uptrend between February and October of this year. However, they took a major beating recently when the company reported its third quarter numbers on November 3. While analysts were expecting KAR Auction Services Inc (NYSE:KAR) to report EPS of $0.53 on revenue of $770.84 million for the quarter, the company declared EPS of $0.50 on revenue of $773.80 million. Nevertheless, this recent decline in the stock has helped push its forward yield to above the 3.0% mark, as it currently stands at 3.27%. On October 26, analysts at Susquehanna initiated coverage on the stock with a ‘Positive’ rating and $50 price target, which suggests potential upside of over 20%.

Related Reading: 10 Most Expensive Cars Ever Sold At Auction

Berry Plastics Group Inc (NYSE:BERY)

– Shares Owned by Fort Warren Capital Management (as of September 30): 442,479

– Value of the Holding (as of September 30): $19.40 Million

Berry Plastics Group Inc (NYSE:BERY) was the only stock in Fort Warren’s equity portfolio in which the fund reduced its stake during the third quarter, albeit by only 3%. Berry Plastics Group Inc (NYSE:BERY) has also been one of the best performing stocks in the fund’s portfolio this year considering that Fort Warren initiated its stake in the company during the last quarter of 2015 and the stock has moved up by 22.75% year-to-date. Most analysts who track the stock expect it to continue its upward march in the coming months. The stock currently sports an average rating of ‘Buy’ and an average price target of $52.04 from 13 leading analysts and research firms on the Street. At the end of September, Berry Plastics revealed that its Board has elected E. (Tom) Salmon as the President and Chief Operating Officer of the company, effective October 3, and that its current Chairman and Chief Executive Officer, Jonathan D. (Jon) Rich will be stepping down as CEO in February 2017, but will continue to serve as the Executive Chairman of the Board.

SPDR S&P 500 ETF Trust (NYSEARCA:SPY)

– Shares Owned by Fort Warren Capital Management (as of September 30): 2.55 Million

– Value of the Holding (as of September 30): $550.72

Finally, let’s address the massive bearish bet that Fort Warren Capital made during the third quarter, by buying a massive set of put options on the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). As most people know, the SPDR S&P 500 ETF Trust is the most widely-traded ETF, tracking the S&P 500 Index, so it is quite evident that Fort Warren has quite a pessimistic view on US equities entering the fourth quarter of 2016. If the fund still held this position prior to the Presidential elections a few days ago, one could have argued that it would be sitting on massive profits. However, now that the storm has passed and the S&P 500 Index is trading flat for the quarter, we think that the fund’s conviction on its ‘big short’ could have gone down by a few notches, despite possibly getting the outcome it was a betting on; a Trump victory.

Disclosure: None