Lakewood Capital Q3 Letter Explains Shorts In Viasat And 2U, Inc. – ValueWalk Premium
Lakewood Capital

Lakewood Capital Q3 Letter Explains Shorts In Viasat And 2U, Inc.

Lakewood Capital Management must feel like Chicago Cubs designated hitter Kyle Schwarber, who is firing on all cylinders in the World Series after a year of rehab. Likewise, Lakewood Capital generated strong 4.3% returns in the third quarter. But the win size could have been much more significant had it not been for the short exposure, according to the hedge fund's Q3 letter, a copy of which was reviewed by Walk.
Lakewood win size higher than loss size as benchmark performance exceeded on both sides of exposure ledger
Much like pitching a no-hitter in the World Series, there are some needles that are just difficult the thread. In a long / short hedge fund strategy, getting both sides of the exposure to generate positive returns is unusual, particularly in a quantitative easing environment. That said, Lakewood Capital’s Anthony Bozza found fat tail returns on the quarter.

During a quarter when the general benchmark S&P 500 was up 3.31%, Bozza's Lakewood Capital outperformed by a factor of three on his unhedged long exposure. Naked longs on the quarter were up 10% while the hedged equity ownership was up only 3% positive returns.

It was the short exposure that trimmed performance, subtracting -7%. On the quarter win size was near 1/3 higher than loss size, a factor considered in certain algorithmic hedge fund allocation models.

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Lakewood Capital - big winner on banks as interest rate rise anticipated
Big winners in the portfolio were mostly big names: MasterCard and Citigroup in the financials recovering from Brexit woes alongside Deutsche Bank woes and a transaction-dependent FedEx in transports showing economic signs of life helped the portfolio.

Looking at the market environment from a fundamental point of view, Bozzo paints a limp but steady picture, one where certain rate-sensitive stocks, such as utilities, real estate investment trusts and consumer staples, have pushed to near record valuation levels. This leaves the fund in “a complex stock-picking environment.” Calling low interest rates a “well-publicized challenge to the financial sector,” he likes the banking sector at this point, looking for and receiving a mean reversion in the sector.


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