Teton Capital Un-Booked Short Profits Caught In Asian Regulatory Freeze

Technically Teton Capital Partners is down -5% year to date as of June, according to  investor letters reviewed by ValueWalk. This is a relative oddity for the billion dollar  long / short fund. Since 2001 the hedge fund with an 18.8% compounded annual return, run by Kleinheinz Capital “cub” Quincy Lee, has only experienced one negative year. But don’t let looks deceive. Short exposure in the fund where trading was halted could impact performance in a positive way when shares trade again on an open market.

Teton Capital not hooked by China Ocean's fish that got away story

When Teton took a look at the stock of China Ocean, little did they know it would be a “rollercoaster ride” that would “secure a place in the Teton short hall of fame.”

Like most hedge fund research hero stories, the analysis is probing for holes in the consensus thinking.  What first stood out was a profit anomaly.  Teton conducted a relative value analysis that is known to work for stocks as well as in evaluating hedge fund investments. Find the “beta,” used loosely in this instance, and then compare revenues both over and under the given market environment.

In the case of China Ocean, the owner of fishing boats located along the Chinese coast was exhibiting significantly higher profitability per boat than the Chinese fishing boat average. “We found that China Ocean’s vessels had 9x the sales vs. comps, and China Ocean claimed high profits while the comps were losing money or break even at best.”

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