Winner of this year’s Hedgeweek USA Award for Best Event-Driven Manager is Stamford, Connecticut-based investment adviser FrontFour Capital Group. Co-founders David A Lorber (pictured) and Zachary R George alongside partner Stephen E Loukas co-manage the firm’s flagship fund, FrontFour Capital Partners LP.
The firm employs a fundamental value-oriented approach combined with intensive research to execute its portfolio strategy, seeking out market opportunities created by events or specific catalysts. Event-driven opportunities are sought across the capital structure in both credit and equity, including bankruptcies, asset sales and refinancings as well as equity-driven mergers and acquisitions, spin-offs, stock buy-backs and turnarounds.
FrontFour’s investment process aims to identify the best value across the capital structure in order to deliver superior risk-adjusted returns to investors. By carefully developing a repeatable investment process, the firm’s trading strategies are able to exploit market events in multiple environments. Media, Canadian real estate, cable and packaging were four of the fund portfolio’s larger weightings as of April 2011.
The firm hedges out risk through establishing long put positions on the market while trading short put positions around volatility. The firm also reduces its net exposure through short positions based on industry exposure and single name alpha-driving shorts.
According to Lorber, the first six months of 2010 were focussed on distressed debt, rotating across to equity opportunities in the second half of the year as the corporate event cycle began. “With management teams having spent the previous few years restructuring operations and solidifying capital structures, corporations renewed their focus on offensive strategic action,” he says. “We see this continuing in 2011. With continued accommodative debt capital markets, we expect an active deal environment.”
Lorber adds that the most notable curveball last year was the European sovereign debt crisis between May and August. Protecting investor capital during this volatile period was a challenge, amid fears of a US double dip recession that led to a sell-off of risky assets.
Says Loukas: “We managed the portfolio risk during this volatile period through trading around core positions, reducing exposure, managing our hedge overlay and stressing our underlying investment thesis of individual positions. As macro fears subsided, the FrontFour portfolio was in a position of strength.”
One key event that FrontFour traded concerned Six Flags Entertainment Corp, which emerged from Chapter 11 bankruptcy protection last May with a noticeably deleveraged balance sheet. “We owned the ‘holding company’ bonds, which were converted to equity through a rights offering that helped fund Six Flags’ exit from bankruptcy,” Loukas adds. “In 2010 we were up more than 50 per cent in the trade.”
What really helped FrontFour stand out from the competition last year was its ability to trade successfully around core positions while maintaining a robust hedge overlay strategy. This dynamic hedging enabled the portfolio to generate returns with low correlation to overall markets, capturing event alpha with minimised downside risk.
As George points out: “The principals have served on many public company boards. This experience gives us a unique perspective on the pace and impact of corporate action and the conflicts of interest that can exist between stakeholders, management and directors.”
On winning the award, Lorber adds: “It is a great complement to be recognised by our peers and the hedge fund investment community. We look forward to continuing to perform for our partners and grow FrontFour in 2011 and beyond.”