Mendon Capital Advisors is based in Rochester, New York. Founded in 1996 by Anton Schutz (pictured), the fund employs a long/short equity strategy with an event-driven slant, and focuses primarily on the US financial services sector.
Since inception, the fund has managed to generate annualised returns of 14.20 per cent, with an annualised risk-free rate of 0.10 per cent and a Sharpe Ratio of 4.00 (through January 2013).
The long book typically holds between 40 and 60 positions, while the short book holds between 15 and 30 positions.
Schutz spent 10 years at Chase Manhattan Bank before setting up Mendon. This, he says, gave him a deep strategic insight into the operational ways that banks get managed.
“The reason I chose to start this fund was so I could focus on the consolidation of US banking. It’s already gone through a tremendous wave of consolidation but there are still 7,000 banks in the US,” notes Schutz. Indeed, while the strategy is able to pursue opportunities across the financial services sector, it’s really banks and thrifts that provide the main focus.
The fund’s objectives are essentially to exploit the fragmentation and ongoing consolidation trends in the financial services sector. This is achieved by focusing on small-cap companies, who are likely to become the target of M&A activity.
“We still do multi-cap but my bigger wins tend to come from the smaller names where I really have an edge; I understand their franchise, and I have a good idea of who would likely buy them,” says Schutz, adding that the team currently monitors between 600 and 800 names.
Schutz is a bottom-up stock picker and physically shorts stocks although in periods of low volatility these might be substituted with individual put options. When trying to identify shorts, Schutz says that there a number of factors: firstly, the credit quality of the institution and subsequent loan composition. Secondly, where are they in the M&A space? “Are they a seller or a buyer, and if so are they a stupid buyer? Certainly, undisciplined acquirers are a key factor to consider when shorting.
One of Mendon Capital’s strengths is the ability to build positions on the long side way in advance of any expected takeover deal. This is where Schutz’s expertise comes into play.
“We meet with management teams literally hundreds of times a year. We know the ins and outs of these companies. We don’t just know the numbers, we know the people.
“I spoke with a big bank recently and asked whether the CEO ever envisaged selling. His response was: ‘All it takes is one bad visit to the doctor’.”
Schutz says that they had seven M&A deals in the portfolio last year, which helped performance: “We’ve already got off to a great start this year and we expect to see a lot more M&A deal flow. I think in the next five years we’re going to see the number of US banks fall from 7,000 to around 4- to 5,000 banks.”
On winning the Hedgeweek award, Schutz says: “We’re excited to get recognition for the fund. After having been through the insanity of the markets over the last few years we’re pleased not only to still be in business, but to have received this award. It’s a great honour.”