Passport Capital’s Confused Strategy Leads To Negative Alpha In 2011VW Staff
In the outgoing year Passport’s main fund “Passport Global” recorded double digit losses of 18.4%. The fund posted negative alpha of11.5% and 20.5% from its benchmark indices MSCI AC world and S&P 500, respectively. The fund played with its long/short strategy mainly in equities with exposure in materials, energy and other diversified stocks. Despite of vast diversification and combination of long and short, the fund was unable to produce positive alpha on either side.
Assets under management:
The company currently manages a total of $3.8billion in assets of which Global fund accounts roughly 47% or $1.8 billion.
Passport Global performance relative to benchmark:
Following table shows Passport Global fund returns for 1, 3 and 5 years and performances of the benchmark indices.
In terms of relative terms, last year the fund underperformed MSCI AC World and S&P 500 by 11.5% and 20.50%, respectively. The fund posted losses from its long as well as short positions in equities. Besides equities, the fund underperformed in commodities as well.
Long/short exposure mix:
By the end of fourth quarter, the fund long position exposure was recorded at 66% against the short position of 59%. The management holds bearish view for 2012 and believes that the economic growth and European debt position will keep markets subdued. Resultantly the company may increase its exposure in short position. Following table shows fund’s long and short mix for last three quarters.
The fund managers’ tried to play with its long and short positions to capture market inefficiencies, but the fund was unable to take advantage of the market volatility. Passport Global is designed to adjust its long and short positions in order to cater the excess risk the fund may have added due to market conditions, but the fund’s entry and exit timings mismatched to capture decent returns.
Moreover, the fund mainly suffered losses from its illiquid portfolio which dipped drastically in the outgoing year. The fund performance further dished as it witnessed losses in its gold investments led by the selloff in bullion market during December 2011
Reducing exposure in illiquid stocks:
The management is in the phase of reducing exposure in fund’s illiquid position, excluding exposure in mortgages and private equity. In the last quarter ending December 31, 2011, the fund liquidated almost half of its total exposure in illiquid stocks from previous quarter levels.
The company defines illiquid investment as an investment which will require more than ten trading days to liquidate fund’s position, being one fourth of the average daily volume.
Passport Global Fund primarily invests in global capital markets seeking return from prevailing market inefficiencies. The investment team covers Agriculture, Basic Materials, Consumer, Energy, Financial Services, Healthcare, Capital Markets, and Internet/Technology. Moreover the macro economic analysis of the fund covers large material changes globally. With the combination of two, the fund invests in existing opportunities. As far as fund’s short positions are concerned, they are designed to manage the risk level of the fund that has arisen due to the long position of the fund. Also, additional short positions are used to cater market imbalances to increase relative returns.
Passport Capital other funds:
Besides global strategy, the group also follows long short, mortgaged-back securities, materials, energy, special opportunities and basic materials all cap strategies.
The Strategy for 2012:
On the back of bearish view on the market the fund is expected to follow a safe strategy by reducing exposure in illiquid stocks and increasing hedges and short positions.