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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. |
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Since Inception Relative Performance
Graph vs DJIA and 7 -10 Year Bond Index Latest Trades
Comments 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. |
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Since Inception Performance Chart vs Equity and Bond Benchmarks
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