Distressed Opportunities Fund
In a financial crisis, the share values of some good companies can fall to levels unjustified by even the worst case scenario. The simple reason for this is the forced selling of some financial institutions as the short term credit used to finance these security holdings dries up. In such a case, people who have access to capital can accumulate shares of some high quality companies with stable cash flows to realize outsized returns as the crisis ends. Also investments in too big to fail financial institutions or infrastructure companies can give way to returns up to 5X-6X the invested amount unless the very unlikely scenario of complete nationalization.
Such a strategy paid off extremely well for investments made right after the 2008 crash and the same is expected to happen with the European Financial Crisis of 2011. The Distressed Opportunities Fund aims to take advantage of such a strategy to invest in structurally important companies across Southern Europe and also the related companies in the US. The fund will operate on the basis that even if some of these companies gets nationalized many of the remaining ones will have their share prices rising up to %500. In this manner the fund aims generate outsized returns on a risk adjusted basis.
June 4th’ 12 11:52
The market has declined so much during May 2012, that I decided it is worthwhile to start trading this Fund by accumulating some high-beta stocks at very low levels. Of course, one of the securities that I have chosen is the iShares Spain ETF, as at these levels it is a real bargain. Also it will rocket higher in case of any positive developments in the Eurozone. The other two stocks KBH and MAS are not necessarily very distressed in terms of their valuation but rather distressed because of their exposure to market sentiment. I will probably try to sell these at a market top before August 2012.
May 9th’ 12 13:35
I recently posted an article on Seeking Alpha, about how the very heavily shorted distressed stocks might actually rise in a market swoon, because of the unwinding of the pair trades. Based on that theory I will try to actively trade this Fund in late May or June 2012. However, market developments will be much important than the theory of course.
Mar 26th’ 12 13:15
KB Home is getting my attention as a possible trade to get this Fund start trading actively. The loss is not steep enough to trigger capitulation yet. But the stock is definitely getting hit for no good reason. Its earnings report was probably an anomaly. At the very least arbitrage opportunities might arise since other housing stocks like TOL and DHI aren’t getting the same treatment despite the fact they are subject to the same market conditions.
Jan 26th, 12 10:18
There has been a rally in the National Bank of Greece in excess of 60%. I just wanted to make a note of this as the return potential in these Southern European stocks even at a hint of a solution to the European financial problems. Obviously the Fund did not participate in this rally and this is a great example of the fact that there might be missed short term opportunities. However, we are not at the stage yet where the returns are not threatened by a sharp reversal that takes back all the gains and then some. The rally in these stocks seems to be due to perception rather than a fundamental solution to the European problems. In my opinion, there will still be very high returns to be made when the fundamental solution is reached and it is not worth chasing these short-term rallies before that happens.
Dec 8th, 11 14:51
As noted in the General Comments section I have also initiated long Long-Term Treasury positions in the Distressed Opportunities Fund also. The ultimate solution to the Greek problems still seems quite far off. Until then the Fund will probably maintain these Treasury positions to generate some income and take advantage of a possible decline in the equity markets.
Dec 3rd, 11 10:32
It goes without saying that the components of the Distressed Opportunities Fund will be some of the most volatile. Obviously many possible investments are from Southern Europe and from a risk-return perspective it does not make sense to take the risk in dealing with these stocks when the situation in Europe is still volatile. Make no mistake that there will be very sudden and sharp rallies sometimes, when it will feel like the opportunity has passed, especially in Greek and Italian financials. However the purpose of this Fund is not to catch the exact bottom, but to make profits from the fact that many of these distressed stocks are structurally important and will eventually recover. When the European situation clears up a little more, probably in the sense that ECB bails out southern Europe, the Fund should start to accumulate shares. When that happens there will probably be a note in the General Comments section so check that out.